Brand Valuation.The key to unlock the benefitsfrom your brand assets.

Creating and managingbrand value Interbrand Zintzmeyer&Lux

Brand RelatedServices

The Interbrandapproach to valuation.

The value of a brand lies in its economic benefit – brand value is therefore defined as the netpresent value of future earnings generated by the brand alone. Interbrand’s approach is based onthe following three economic functions: 1) the brand’s function to create cost synergies, 2) thebrand’s function to generate demand for the products and services, and 3) the brand‘s functionto secure future demand and thus reduce operative and financial risks. The method employed toevaluate brands comprises five steps: segmentation, financial analysis, demand analysis, brandstrength analysis, and, finally, the calculation of the net present value of brand earnings.

Segmentation: Consumers’ purchasing behavior and attitudes towards brands differ from onemarket sector to another, depending largely on product-, market- and distribution-related factors.For this reason, the value of a brand can only be determined precisely through the separateassessment of individual segments that represent a homogenous customer group. Apart from this,brand management can only obtain the insights it needs to increase the brand’s valuesystematically if the brand has been evaluated in all its segments.

Financial Analysis: Interbrand’s brand valuation begins with an assessment of the company'svalue and then determines the value contributed by the brand. The first step towards isolatingbrand earnings from other forms of income is to determine the Economic Value Added (EVA)which tells whether a company is able to generate returns that exceed the costs of capitalemployed. As both value creation and its counterpart, risk, lie in the future, the analysis is basedon a five-year forecast of future revenues generated in the brand segment being assessed.

Interbrand’s approach is based on the threeeconomic functions of a brand: 1) to create costsynergies, 2) to generate demand for theproducts and services and 3) to secure futuredemand and thus reduce operative andfinancial risks. The three economic functions ofa brand are assessed in the three analyses.

The example above shows a typicalsegmentation that differentiates the significanceof the brand between relevant customer groupsin different markets.

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Step five: Calculating the brand's value.

Segmentation of the brand

Financial Analysis

Economic ValueAdded (EVA)

Demand Analysis

Role of BrandIndex (RBI)

Brand Earnings

Strength Analysis

Brand StrengthScore (BSS)

Net present value of brand (segment) earnings

Brand Risk(Discount rate)

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Brand

Services

ProfessionalProducts

GermanyFrance

Spain

Benelux

GermanyFrance

Spain

Benelux

ConsumerProducts

GermanyFrance

SpainBenelux

Eastern Europe

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Brands create shareholder value.

Recognition of message Preference building Acquisition and retention

Communication efficiency Economies of scalePrice premium

Risk mitigation

Reduction of investments Higher earnings Reduction of cost of debt

Shareholder value(higher economic value added)

Brand1.

Origin, Orientation,Interpretation

2.Differentiation,Self-realization,Identification

3.Continuity, Certainty,

Confidence

The brand’sprimary functions

The effect on thereceiver (customer)

The influence onthe operation

The financialconsequence

Demand Analysis: In this step, Interbrand analyzes the brand’s value chain and identifies theposition of the brand in the minds of customers. To determine the brand’s share of EVA,Interbrand examines what factors influence demand and motivate customers to purchase. Thesefactors are weighted in terms of their bearing on demand and for each, the contributions of thespecific associations with the brand are statistically calculated. The sum of these brandcontributions on the demand drivers is expressed as the Role of Brand Index (RBI) which,multiplied with the EVA, yields the brand earnings.

Brand Strength Analysis: The stronger a brand, the lower is its risk, and thus the more certain arefuture brand earnings. Interbrand assesses this risk by analyzing the strength of a brandcompared with its competitors on the basis of seven factors (i.e. market, stability, brand leadership,trend, brand support, diversification, and protection). In fact, a broad range of measured attributesexplains the seven factors and facilitates an all-round diagnosis of a brand’s competitive position.This step results in the Brand Strength Score (BSS).

Net Present Value Calculation: The economic value of future brand earnings is inversely correlatedwith the brand’s estimated risk and this risk is directly linked to brand strength. The trans-formation of brand strength into brand risk (or into discount rate,) is completed using an S-curve.The procedure reflects the dynamism of the market, where brands at the extreme ends of thescale react differently from brands in the middle range as regards changes in their strength. Thestrongest brands are discounted with the risk-free rate of the total market while average-strengthbrands are discounted with the industry WACC (cost of equity in the financial service industry).Discounting the forecast period (present value) and the calculation of an annuity (terminal value)results in the total value of the brand.

Since this procedure focuses on value creation, it is independent of potential and probablechanges in organizational structure. The total value of the brand is calculated as the sum of itssegment values (sum-of-the-parts).

The Brand Strength Score, which measures thecompetitive strength of the brand, istransformed into a discount rate on the basis ofthe S-curve. The Industry WACC (cost of equityin the financial service industry), which ideallycomprises the same competitors assessed inthe Brand Strength Analysis, is used as thebenchmark for the company’s overall risk.

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5

4

-1

3

10

9

3

1

12

5

-5

-2

3

3

Brand strength measures the competitive performanceof the brand.

Market growth

Industry Concentration

Satisfaction

Customer Loyalty

Market share

Awareness

Consideration

Attractiveness

Share of advertising

Identity

Geographic diversification

Offer-related diversification

Date of registration

Legal coverage and monitoring

Average Brand Strength +–

Market

Stability

Leadership

Trend

Support

Diversification

Protection

Significance of demand drivers (Total 100)Role of Brand Index (Total 40%)Role of Brand industry sector average (36%)

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Different for the various brand segments.

Quality

Innovation

Design

Value/Money

Ease of use

Reliability

Leadership

Product Features

0% 10% 20% 30%

Significance of demand drivers (total 100%)Role of brand Index sector average (36%)Role of Brand Index (total 40%)

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Brand Strength Score (BSS)0 20 40 54 80 100

Bran

d ris

k

Risk-free ratee.g. 3%

Discount ratefor brand earnings

e.g. 9%

Industry WACCe.g. 10%

Max. risk

Performance of the strength attributes in comparisonwith the industry average (Brand Strength Score 54%)IBZ&L

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Product.

2005500

(407)94

(25)69

130(13)

56

2006520

(423)97

(26)71

130(13)

5823

1.0921

101277378

2007550

(447)103(27)

76

140(14)

6225

1.1921

2008580

(472)108(29)

79

150(15)

6426

1.3020

2009620

(503)117(31)

86

160(16)

7028

1.4120

2010650

(528)122(32)

90

160(16)

7429

1.5419

2004480

(390)90

(24)66

120(12)

54

Year 2003440

(357)83

(22)61

110(11)

50

Branded revenueOperating costsEBITTax 26%NOPAT

Operating assetsWACC 10%

Economic Value Added (EVA)RBI 40% (Brand earnings)

Discount rate 9%Discount factorDiscounted earnings

Value until the year 2010Terminal value (growth = 2%)Net present value of the brand segment

Origin and performance record.

A systematic approach to brand valuation was jointly developed by Interbrand and the LondonBusiness School in 1988. The method was partially revised in 1993. Since then, Interbrand hasevaluated some 3500 brands for nearly 400 companies. These assessments comprise corporateand product brands, complex brand systems, and simple "homogeneous" brands. Depending ontheir purpose, evaluations can be broadly divided into two categories:

1. Evaluations for financial transactions in connection with mergers & acquisitions, internallicensing and fiscal issues, as well as reporting or financing questions.

2. Evaluations for specific brand management purposes with a view to optimization of brandinvestments, long-term controlling, internal and external communication and sustainableincreases in brand value.

The Interbrand model is one of the most frequently referenced methods in the internationalmarket. It is effectively the only method that has gained consistent global acceptance during thepast ten years: valuations based on the Interbrand method have been used by, among others,the US Internal Revenue Service and the tax authorities of many other countries, by theMonopolies and Mergers Commission in Great Britain, by the European Antitrust Committee,and by judicial courts in the USA, Germany, Austria, Great Britain, Ireland, France, and HongKong. The Interbrand method of brand valuation has been assessed by all the world’s leadingauditing firms in conjunction with numerous balance sheet projects. In countries such asAustralia, France, Great Britain, and New Zealand, the capitalization of acquired brands hasbeen permissible for years.

The Interbrand method is based on formulae and procedures considered standard in generalbusiness management as well as in financial and marketing theory. The method is thereforeabsolutely transparent. Since input data are generally obtained through primary studies, thebrand values derived from them are objective and highly reliable. Moreover, the economicfunctions of the brand are also included entirely and individually as part of the analysesdescribed above and are thus expressed as part of the company's value. Brand valuation thusblends in seamlessly with conventional corporate strategic thinking and procedures. As a result,the integration of value-oriented brand management into value-oriented corporate managementis effortless.

Interbrand is a member of various national bodies whose central concerns include the regulative,normative and communicative promotion of brand value. In Germany, we play a significant role inthe activities of the DIN (Deutsches Institut für Normung e. V.) and the Brand Valuation Forum(a work group set up by Germany's GEM), which focuses specifically on communicativefunctions. Our involvement on these boards is coordinated within the Interbrand network andcreates a foundation on which the standardization and reporting of companies with regard tobrand value can be based.

The Interbrand method has been used worldwidein numerous value-related purposes for brandmanagement, balance sheet capitalizations,licensing, litigation, asset-backed securitization,business combinations, brand migrations, etc.