When valuing a business, there are two primary assets that are considered. These are tangible assets and intangible assets. Tangible assets are physical assets such as real estate, equipment, inventory, etc. Conversely, intangible assets are not physical in nature and include intellectual property, brand recognition, and goodwill. Despite being intangible assets, brand recognition and goodwill are intrinsically tied to the value of a business.
Brand recognition is the value of someone recognizing your brand. A brand may include certain characteristics of the goods, logos, slogans, etc. For example, the Chevrolet badge is commonly referred to as the “bowtie” and carries with it certain preconceptions. Similarly, Ford’s emblem is known as the “blue oval.” For anyone who is a truck enthusiast, they will know that aside from styling differences, they may discount the value of a vehicle based on the brand. The primary issue with brand value is in the name itself – the value of the brand. Identifying what a brand is worth is a mix of psychology, sociology, economics, and field research. Interbrand publishes an annual “Most Valuable Global Brands” list which uses three key elements to create a complex valuation: financial forecasting of the future revenue associated with the brand, the role of the brand as a percentage of overall revenue, and brand strength which includes metrics such as awareness and loyalty.
For 2018, the five most valuable brands are:
- Apple
- Amazon
- Microsoft
- Coca Cola
These are five companies that are generally associated with quality and are recognized by nearly anyone on the planet. As a result, products launched and sold under their brand are likely to perform well. Amazon’s ability to continue to expand into new markets is primarily driven by the value of its brand – when it offers a new product, consumers associate the quality and value of the new product with the quality and value of the overall Amazon brand.
For business owners, maintaining a strong brand value is essential. Whether you’re an automotive dealer in a small town or a national marketing agency, your business’ brand is paramount to the business’ success. An association with high quality and high customer satisfaction means it’s easier to expand in size or offerings, whereas a bad brand association means you have to first overcome the lack of brand value to establish a new business line or expand.
Similar to brand value, goodwill is an intangible asset that acts as a value for normally unquantifiable intangible assets. Goodwill is determined when one company acquires another. For example, if Company A acquires Company B for $100 million, and Company B has a value of $90 million based on all identifiable tangible and intangible assets, then Company B has goodwill worth $10 million. For a business owner, maximizing brand value often results in long-term success, and in the context of selling the company, goodwill is the calculation of that intangible value.