CONSOR Chairman Weston Anson was recently quoted in a new book on the subject of intangible asset valuation. Jose Roberto Martins, CEO of GlobalBrands Consultoria, headquartered in Brazil, previously sat down with Anson to discuss his views on such valuations.
Martins has provided CONSOR with exceprts of the book in English. Read below to see Anson’s opinions about where to start when valuing intellectual property.
Chapter One – The Theory Of Intangible Assets
It is not possible to recognize, evaluate, judge and manage intangible assets without the minimum knowledge of its theoretical basis. If the appraiser does not have a solid professional experience, reputation and the knowledge of the basics combined with a dedicated research in the field, he will certainly conduct incomplete analyzes and produce assessments or judgments without the necessary fundamentals. This first chapter will not certainly be exhaustive, but will certainly provide valuable resources to anyone interested for further study of the different aspects inherent to the complexities of the economic valuation of intangible assets.
We believe that a preliminary and necessary first step is to understand the meanings of the concepts of “intangibles” and “intellectual capital” (or “intellectual property”). Weston Anson (Anson; Suchy; Ahya, 2005) believes that intellectual property is a subset of the family of intangible assets, which in turn is a subset of the entire goodwill. He continues by pointing out that intellectual property is, in fact, an intangible asset that has legal protection and recognition, including brands, product names and services, patents, trade secrets, proprietary technology, copyrights, domain names and other Internet assets, software, among other items which are commonly treated as cost centers by the majority of corporations.
Following the basics of such assumptions, Ansonet alii adds the important concept of bundling, which is critical to our understand on the economic valuation of intangible assets in Brazil and, to some extent, the full value of companies. We assume that the concept means that one or more elements of intellectual property and / or intangible assets will always travel together. For example, in a draft economic valuation of the intangible assets of Coca-Cola, including its famous brand, the job would only make sense (for the purpose to value the Coca-Cola business) if the brand valuation could be accompanied by other tangible and intangible assets, such as the secret recipe of the syrup, its bottling agreements, infrastructure distribution, software, key personal agents and so on.
Chapter 3 The Uninformed Market
Brands are undoubtedly the most recognized and known intangible assets, and therefore also more subject to greater influence of opinions and judgments, not all expressed optimally and often in contradictory ways. We have a plethora of resources very well established brand management practices and theories to judge brands as the main stars from the theories and practices of marketing and communication. Yet many existing metrics used in the world of communication and advertisement cannot be directly applied to the economic valuation of brands. We selected the example of top of mind, rather worshiped in Brazil as metric of success and recognition of brand success. Yanaze (2007, p. 276-277) says that:
“One way to measure the prestige of a brand is to assess the extent to which it is associate to the product category it represents. When the brand is the first to be remembered by consumers in a given product category, it usually means that the brand is “top of mind” (located at the top of mind of the consumer). The top of mind is usually associated with the company’s participation in the market”.
We are sufficiently experienced to know that the top of mind is achieved by conducting research in selected markets, usually resulting in the classification of brands in categories of products and services. We are not enthusiasts of top of mind, because, notwithstanding the importance of the privileged position of being the first brand in the consumer’s memory, we cannot assure that it will be the most purchased brand, and, also, that the brand will also guarantees that this advantage will allow the owners to charge a higher price than the brands positioned in the lower positions.
The Brand Valuation Rankings
The measurement of the top of mind is an information resource obtained from market research with qualitative and quantitative approaches. It is only an informative function and alone (out of the bundling principles) is inappropriate to instruct a review of the brand image. Even if it were possible, this measurement would be very limited because you cannot judge a company’s image as a good or bad if you not also investigate other types of external and unusual types of information, along with all public brand.
The way we understand and value the image of a brand at GlobalBrands, it is also necessary to consult the IRS compliances, SEC fillings analysis, Courts, public lists of consumer complaints and other real world resources not usually related to brand marketing. If the company is publicly traded, research can be extended by searching the websites of SEC (Securities and Exchange Commission) of the United States, in the case of Brazilian companies with shares traded on that country. We see that if the image of the brand will not do well in the surveys used as examples, one cannot imagine that consumers can count on their favorite brands for a long time, at least without some sort of threat of annoyance.
In addition to the formal financial and social information, the appraiser also needs other types of internal information for a set of accurate business data. Costs of raw materials and production, terms of agreements with suppliers, dealers and distributors, investment projects, industrial processes, net margins, among other information, are strategically important to recognize the differences of the intangibles under the valuation processes its marketing strategy and the impacts they could cause in their accounts and projections. Much of this information is always confidential and cannot be disclosed without compromising the competitive advantages that ensure the performance and survival of the business. In Chapter 5 of this book, we offer a large sample of such information and how creatively they can be considered in an evaluation process of brand and other intangible assets valuation.
Even when the appraiser is hired by the company, the lifting of internal information can be difficult for many reasons, such as lack of voluntary and involuntary cooperation of managers, resulting, for example, in providing incomplete information due to the lack of engagement due the unwillingness of managers dissatisfied with their employers, and other complicating factors of no less importance. If even working inside companies, appraisers’ work can be difficult, then imagine if they act only externally. And not only to arbitrate the value of an intangible asset, but to objectively classify it in relation to competitors or a segment.
I’m quiet to criticize the brand valuation rankings, as I do since 1996 when there was none of the consultants in Brazil who practice or intend to practice such fancy publicity resource.
I wrote The Brand´s Empire in 1995. We must take into account that the book was a very bold book, written in a time when the brand management and the valuation of intangible assets were incipient issues worldwide. The knowledge about those topics was a novice. Nut in nowadays where we develop a more sophisticated knowledge on those subjects the complacency of the media for such fancy jobs are hard to understand, especially when we see that brands are valued and celebrated as solitary stars of corporations; silver bullets able to eliminate threats overlooking permanent, such as the inability to mask companies generate sustained profits, among other risks of greater or lesser severity.
GlobalBrands is not laggards in branding, management and the economic valuation of intangible assets in Brazil. If at that time we believed in the viability, usefulness or necessity of producing rankings of the value of Brazilian brands, it would not have been difficult to practice what has become a fad in the market and reproduce or adapt the Interbrand´s ranking. His math is quite simple and has undergone a little since its release in the 80’s, except that the data are still based on information obtained from public balance sheets, which limits the validity of the rankings on an annually basis. Accumulating profits or losses, the brands will continue to be evaluated. The novelty, however, is that brands belonging to companies that have losses may be excluded from the lists.
What Are Brand Value Rankings Good For?
In science theory we say that a fact only has meaning as it adds or diminishes the plausibility of a theory. We will not treat theories disseminated by the consulting firms that produce rankings, but let us assume that they would have us to believe that the brand value calculated once a year is the final value of them – and only them (which excludes the value of other valuable intangible assets such as the distribution infrastructure of the Coca-Cola brand). Considering the current economic scenario we will strengthen our aim to discuss such theory from an antagonistic position; dispassionate.
You do not need to be an experienced expert to easily understand the technical limitations of rankings in the current economic scenario. In this book, for example, we did not save quotes from a number of sources of high-quality research regarding the valuation of brands and other intangible assets. What we find in the literature is that no work on the analysis of such rankings emerges as objects of study or as technical references that can be assimilated by organizations productively and in the direction to help companies to explore their intangible assets properly. Perhaps even to the formulation of advanced standards for the economic evaluation of intangible assets, which would be a very useful result when engaged economic leaders are desperately looking for innovative tools to solve the huge challenges of the economic world crises.
If we consider that the pioneering of Interbrand´s ranking has existed for quite some time, one would expect that their method had already been notable among the high quality economic researches community. We, for example, would not have the slightest problem in applying such practices even though they were from our competitors. Proof of our willingness to recognize in the best practices is to assimilate the principles and tools of methods and principles of several researchers in the field, which methodologies we use in our valuation projects. By using high quality technical content and superior argumentation, and always with the citation of sources, we are, of course, open to recognizing and endorse the work of other researchers, perhaps even potential competitors. What differentiates one from the other consultant is not necessarily just what a company claims to control as a secret information, but the quality of what it produces. Any experienced consultant can prove this result, for example, to provide its customers its technical assets supported by certificates issued by the companies they attended.
What we can note, since the first edition of Brand´s Empire (1995) is that the quality literature of business and economics are replete with much criticism about the risks of poor brand management than the monetary value of brands in the lists. These, when cited as useful news are derived from authors not usually familiar with the valuation principles of practices of companies or even the media agents that do not practice investigative journalism. If they did that basic investigation job, they would seek at least to know if the brands evaluated in suchu rankings are registered or even involved in disputes of serious proportions. However, if we still had doubts about the necessity of production of such rankings as necessary resources we could find that some basics studies would prove that brands exclusively cannot not explain or justify the results obtained by the organizations, even though they have very famous brands. Going back a few pages, we proved that even Apple relies too a crowd of about two hundred suppliers (competitors included) to enable the existence and progress of its brand.
Creative appraisers can also find other sources of analysis and evidences. Take, for instance, the research of professors David Dranove and Sonia Marciano from the Kellogg School of Management. They describe an interesting study of Disney’s revenue, aptly titled “Aligning the theory to the facts” (Dranove, Marciano, 2005, p. 66-70). Challenge the theory that the success of the Disney digital animated films was due to the Disney brand.
The premise is that many analysts forget that the resources of profitability of an organization should be based on solid economic consistency of data. Admittedly, the Disney brand is a valuable intangible asset and of fundamental importance to the business of the organization. But Marciano and Dranove determined that just the brand would not be enough to explain the company’s success. Given the absence of complex features, the research was to evaluate the simplified recipe box office over an extended period, to finally analyze if the brand name was the main asset of the Disney Studios.
©2012 José Roberto Martins: Capital intangível: guia de melhores práticas para a avaliação de ativos intangíveis. São Paulo, Brazil.