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Bridging the gap betweenmarketing and finance™

‘Brand Valuations: Why, When and How’

By: Mary-Ellen Field, IP and Licensing Director

Brand Finance plc

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sectionone

About Brand Finance

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• We are the world’s leading independent brand valuation and strategy consultancy

• We advise organisations on how to maximise shareholder value through effective brand management

• We are specialists with a unique combination of marketing, research, management and finance expertise

• We have extensive global experience of brand valuation, analytics, strategy and transactions

What makes us different?

Valuation I Analytics I Strategy I Transactions

Bridging the gap between marketing and finance

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Canada

USA

Brazil

South Africa

Spain

Portugal

Turkey

Germany

Holland

U.K. (HQ)

Russia

Dubai

Sri Lanka

India

Singapore

Hong Kong

Australia

Our global footprint

South Korea

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Our blue chip clients

Brand Finance works for a wide range of clients conducting national and international brand valuation and brand strategy assignments. Here is a small selection of the clients we have worked with.

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Global recognition

Global press coverage:

Publications:

Media commentators:

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sectiontwo

Intellectual Property

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What are Intellectual Property Rights?

• Registered

1. Patents

2. Trademarks

3. Designs

• Unregistered1. Confidential Information

2. Copyright

3. Unregistered Designs

4. Unregistered Trade Marks

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sectionthree

Patents

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Patents10

• The technical and functional aspects of products and processes

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Patents

• Grant a monopoly for a period of time (20 years)

• Give the owner a legally enforceable right to prevent others using his invention

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Securing Patent Protection

• Patents must:– Be novel– Be inventive, not obvious– Have an industrial application

– N.B. Must be kept confidential before filing application

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Trademarks

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Trade Marks

• Used to distinguish goods or services from those of another• Brands, domain names, logos, sounds, shapes, smells• Brand loyalty – a valuable commodity

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• Provides reassurance for consumers as to quality• Provides value to the brand owner

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RANK 2012

RANK 2011

BRANDBRAND VALUE

2012BRAND VALUE

2011ENTERPRISE VALUE 2012

ENTERPRISE VALUE 2011

RATING 2012

RATING 2011

1 8 70,605 29,543 350,257 244,382 AAA+ AAA

2 1 47,463 44,294 155,895 143,016 AAA+ AAA+

3 2 45,812 42,805 165,151 165,725 AAA+ AAA+

4 4 39,135 36,157 241,208 189,718 AA+ AA+

5 3 38,319 36,220 155,189 154,325 AA AA

6 18 38,197 21,511 199,331 113,327 AAA- AA+

7 7 33,214 30,504 468,287 475,066 AA+ AA+

8 16 31,082 25,807 83,696 69,508 AAA+ AAA+

9 5 30,044 30,674 189,232 192,456 AAA+ AAA+

10 32 28,665 17,780 94,398 64,132 AA+ AA

Top 10 Most Valuable Global Brands 2012

Source: 2012 BrandFinance® Global 500

Figures in US$ million

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Rank 2012

Rank 2011

Brand Brand Value 2012Brand Value

2011Market Cap

2012Market Cap

2011

Brand Value/Market

Cap 2012

Brand Value/Market

Cap 2011

Brand Rating2012

Brand Rating2011

1 3 27,597 27,632 122,741 171,163 22% 16% AAA AAA

2 2 23,229 28,944 133,473 136,069 17% 21% AA+ AA+

3 1 22,910 34,076 50,527 133,551 45% 26% AA+ AAA-

4 4 19,969 26,150 59,551 100,281 34% 26% AAA- AAA

5 5 18,964 19,150 67,064 90,089 28% 21% AA+ AA-

6 9 18,639 17,133 63,133 105,323 30% 16% AA+ AA

7 13 18,231 15,529 53,475 45,505 34% 34% AAA- AA

8 12 16,809 16,643 42,347 64,882 40% 26% AA+ AAA-

9 6 15,692 18,678 55,368 69,604 28% 27% AAA- AAA

10 10 15,464 17,092 174,952 205,564 9% 8% AA AA

Top 10 Most Valuable Banking Brands

Source: 2012 BrandFinance® Banking 500

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Rank 2012 Rank 2011 Brand Domicile Brand Value 2012 Brand Rating 2012% Change in Brand Value

1 1 United States $11.8 billion AA 6%

2 2 United States $7.9 billion AA+ -22%

3 4 France $7.7 billion AAA 1%

4 6 United States $6.2 billion AAA- -2%

5 5 Germany $5.6 billion AA+ -15%

6 7 France $5.1 billion AAA- -10%

7 8 Britain $5.0 billion AA 12%

8 9 United States $3.7 billion AA 22%

9 10 Japan $3.3 billion AA- 11%

10 11 Japan $2.9 billion AA+ -2%

Top 10 Best Beauty Brands 2012

Source: 2012 BrandFinance® Best Beauty Brands 2012

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Brands Can Co-exist Where Confusion is Unlikely

• PEDIGREE dog foods• BOUNCE dog food• BOUNTY confectionery• LOTUS cars• GALAXY confectionery

• PEDIGREE beer• BOUNCE dryer sheets• BOUNTY kitchen towels• LOTUS tissues/LOTUS shoes• GALAXY tights/GALAXY cars

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Registration of Trade Marks

• Trade Mark Registry• 2 tier test

1. Graphic representation 2. Distinguishing goods or services from others 3. Absolute and relative grounds for refusal

• Initial registration – 10 years duration • Renew for further 10 year periods• Community Trade Marks• International registration of trade marks – Madrid

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Registration of Trade Marks

Why register a trademark?

Commercial Exploitation of the

Mark

Monopoly right to use the mark for particular goods

or services

Easier to protect and enforce

registered rights

Renewable for an indefinite period

Authorised use via licensing

agreements

Right to sue third parties for

infringement

Only IP right which increases in value with age if

looked after

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Trademarks - Risks

• Trademark rights are national – others may have secured rights in other territories• Trademarks that have not been used correctly can become generic so that anyone

can use them e.g. aspirin, elevator, corn flakes• Trademarks that have not been policed may have reduced value

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sectionfive

Trade Mark Dispute: Fish 4 Dogs

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Turning a catastrophe into an opportunity23

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Background24

• Fish 4 Dogs is an innovative British company that produces premium pet food and treats made of fish from sustainable sources

• It has grown rapidly over the last five years and exports to over 40 countries.

The owners were led to believe that they could depend on domain names and their European TMs to protect their rights throughout the world

This is a very common misconception. Trade marks will always trump a domain name

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• Fish 4 Dogs launched their product via a distributor in Australia in July and sales took off immediately, F4D’s website was inundated with flattering testimonials and photos of happy dogs.

• In November, a range of canned dog food, “Fish for Dogs” was launched in Australia’s major supermarkets supported by a very substantial advertising campaign, not surprisingly the exclusive distributor was on the phone that day.

• F4Ds called us and said “we have to stop this”

• We carried out a TM search immediately and discovered that the Australian company had filed applications for the mark 18 months before. We had a very serious problem

Managing a crisis

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• Rigorous planning and ruthless execution• Very courageous client who trusted us to make the

right calls• Section 52 of the Australian Trade Practices Act• Good choice of lawyers and trade mark attorney• Excellent record keeping by client, it was all in the

emails• Fear of reputation damage by parent of Australian

company• After the event litigation insurance• Extremely experienced counsel for the other side• No lawyers allowed in to the negotiation room• It made very good future commercial sense for the

other side to work with us not against us

How did we win?

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IP Protection is no guarantee of a quiet life27

• The best innovations are simple, distinctive and useful and unfortunately are the most copied

• This client owns the patents, trade marks and registered designs globally. • The product retails for under £50 and sells extremely well

• This client has to fight a constant battle against large UK retailers and giant corporations who copy his product

• For the last four years he has spent more than each year’s profit on lawyers

• Last year we negotiated a settlement with a US multi national corporation and a UK retailer, who paid damages and agreed not to use the TM again.

• 10 months later it is back in the same retailer with not only our TM but with the registered symbol for good measure

• The retailer agreed to remove it immediately, our client has been threatened with a super injunction to prevent him from speaking to the retailer

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IP AUDITS

An IP Health Check

Tailor Enforcement Strategy

Maximise Value of your brand

Portfolio Management

Review Enforcement Policy

Registration of Rights

Review structure of licenses

Counterfeiting – Customs watch

Licensing IP for financial gain

Records Management

Parallel Imports – Quality Control

Incentives IP creation

Ensure core IP is owned

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sectionsix

Licensing

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What is Licensing?

“A license is a grant of specified rights, for a specified term in a stated territory by the owner of the rights (licensor) to the user (licensee). A license is not a permanent transfer of rights, but a grant of limited

duration. A license does not diminish the rights of the licensor in relation to how the

brand is used.”

Mary-Ellen Field, Licensing Director, BF plc

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Advantages of licensing to brand owners

• Product extensions• New distribution channels• New geographical cover• New customer acquisition • New demographics touched• Additional advertising and promotion• Enhanced trademark protection• Partnerships to reduce counterfeiting• Enhanced brand imagery• Increased brand awareness • Revenue growth and reduced risk

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• Exclusive or non-exclusive• Uniqueness IP rights associated with the brand• IP Protection and enforcement• Existing brand awareness and equity in licensee territories• Master license, sublicense• Risks to the licensor: legal, financial, reputation • Level of competition to the brand and nature of alternatives• Level of support to be provided by the licensor and cost implications• Duration of the license agreement and renewal rights• Obligations of licensee

Considerations when licensing a brand32

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Key Terms of Licences

• Define IP forming subject matter of licence• Permitted use• Type and duration of licence• Consideration and royalties• Geographical extent - exhaustion of rights • Licensor/licensee obligations• Quality Control• Ownership of IP rights• Grounds for termination• Sub-licensing/assignment• Use of acknowledgments by licensee; “reproduced by kind permission

of…” – loss of right to oppose the re-sale of the product in other jurisdictions

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Types of Licence

1. Exclusive– Only the licensee may use the work ( also excludes the licensor)

2. Non-exclusive– The licensor and multiple licensees can use the work

3. Sole– Only the licensor and licensee can use the work

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Which licence to use?

• When acting as Licensor…. - Non-exclusive licences more flexible - Exclusive licences may lead to greater rewards• When acting as Licensee…. - Exclusive licences allow for control - Costs implications • Compromise - Sole licences - Divide exclusive/non exclusive rights based on geographical scope and

duration of licence

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Negotiating Licensing deals• What rights are being granted• Exclusive or non exclusive • Royalty rates: Fixed, adjustable, free, due dates• Territory • Term: Right to renew• Guarantees: Upfront, non refundable, minimums• Performance and reason for termination• Management: management continuity and communication• Licensor obligations• Licensee obligations• No change of control• Don’t let lawyers negotiate the deal

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• Toys 5% - 15%

• Packaging 1% - 5%

• Sporting goods 3% - 10%

• Automotive accessories 3% - 8%

• Luxury perfumes 8% - 15%

• Skincare / Beauty Products 3% - 15%

• Food products 1% - 5%

Example royalty rates*

*All rates are based on percentage of wholesale price

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sectionseven

Why value brands?

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‘Brand’

‘Branded Business’

‘Branded Enterprise’

Definitions

• Enterprise Value – the value of the entire enterprise, comprised of all of the individual branded businesses operated by the enterprise

• Branded Business Value – the value of the entire business operating under a particular trademark

• Brand Value – the value of the trademark (and relating marketing IP and ‘goodwill’ attached to it) within the branded business

What is being valued?

There is no legal definition of the term ‘brand’ and it is often used with a variety of meanings. It is usually helpful to understand the value of the brand (as defined below) for the purposes of communication and performance tracking but also to understand the impact of brand and marketing strategy on branded business value

E.g. Unilever

E.g. Persil

PersilTrademark

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FOCU

S

40What is the purpose of the valuation?

There are a number of different reasons for valuing brands. These range from highly technical to commercially-focused reasons:

Technical:• Balance sheet reporting and impairment reviews

• Tax valuations and transfer pricing compliance

• Litigation and dispute resolution

Commercial:• M&A and financing

• Licensing and JVs

• Establishment of brand management company

• Brand strategy formulation

• Brand architecture review

• Portfolio management

• Brand performance tracking (scorecards)

• Investor relations

FO

CU

STrademark Valuation

Branded Business Valuation

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FOCU

S

41What is the purpose of the valuation?

There are a number of different reasons for valuing brands. These range from highly technical to commercially-focused reasons:

FO

CU

STrademark Valuation

Branded Business Valuation

Technical:• Balance sheet reporting and impairment reviews

• Tax valuations and transfer pricing compliance

• Litigation and dispute resolution

Commercial:• M&A and financing

• Licensing and JVs

• Establishment of brand management company

• Brand strategy formulation

• Brand architecture review

• Portfolio management

• Brand performance tracking (scorecards)

• Investor relations

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The first brand valuation... 1988

• RHM had £300m of tangible assets

• GFW offered £600m for the company

• RHM thought this undervalued the brands

• John Murphy approached RHM with an idea

• 1984 News Corporation valued its mastheads

• RHM valued approximately £680m of ‘brands’

• Both acquired and internally generated

• Tomkins ‘won’ in 1990 @ £950m

• UK accounting authorities were appalled

• Started the process which led to IFRS 3

• A free for all in proprietary brand valuation methodologies

Hovis

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The primary valuation approaches

MarketApproach

Valuation Approaches

Cost Approach

Income Approach

Value estimate

present value of earnings attributable to the asset or costs avoided as a result of

owning the asset

Value estimate

reproduction/ replacement cost-

adjusted for depreciation and

obsolescence

Value estimate

based on multiples or prices from market transactions involving

the sale of comparable assets

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The primary valuation approaches

MarketApproach

Valuation Approaches

Cost Approach

Income Approach

• Price premium

• Volume premium

• Income split

• Multi-period excess earnings

• Incremental cash flow

• Royalty Relief

• Comparable market transactions

• Cost to create

• Cost to recreate

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Introduction to Royalty Relief methodology

The Royalty Relief approach is based on the assumption that if a company did not own any trade marks it would need to license them from a third party trade mark owner instead. Ownership therefore ‘relieves’ the company from paying a license fee (the royalty) for the use of the third party trade marks

By determining the royalty fees the business would theoretically be required to pay, we are able to estimate the proportion of future cash flows that are attributable to the brand – the present value of the post-tax royalties are held to represent the value of the brand today;

Royalty relief is generally accepted as a robust method for valuing brands and patents because:

It ties back to the commercial reality of brands - their ability to command a premium in an arm’s length transaction;

The methodology is specifically recommended by the IVSC for use in IFRS reporting; &

This method relies on verifiable third party data (licensing agreements – where appropriate) and therefore less judgment is involved than other methods.

Brand Finance uses Royalty Relief to value brands in the Banking 500 League Table because:

It is the approach that is most recognised by technical authorities worldwide and favoured by accounting, tax and legal users because it calculates brand values by reference to comparable, third-party transactions.

It can deliver a robust valuation even when only limited data is available

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I can make a whole lot more money skillfully managing intangible assets than managing tangible assets

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”Warren Buffett, CEO

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Brand Finance plc is the leading brand valuation and strategy firm, helping companies to manage their brands more intelligently for improved business results.

If you'd like to know more about Brand Finance, we are eager to hear from you.

3rd Floor, Finland House

56 Haymarket

London, SW1Y 4RN

United Kingdom

Mary-Ellen Field

IP and Licensing Directorm.field@brandfinance.com

+44 20 7389 9400

How can we help? +44 207 389 9400 enquiries@brandfinance.com

Thank You!