In the newsletter dated 18 December 2018, we have discussed:

i) the brand valuation method created by Interbrand which considers analysis on financial, demand and competitiveness of a brand name through protected formulas and indices.

ii) one of the two commonly adopted methods for brand name by the valuation practitioners, Relief-From-Royalty (RFR) method, which is based on the royalty payments saved from owning the brand name instead of renting it from a third-party.

In this newsletter, we would continue to discuss another popular valuation method for brand name.

A. Multi-Period Excess Earnings Method (MEEM)

The MEEM approach determines the value of an intangible asset by calculating the present value of cash flows contributed by the subject asset after deduction of proportion attributable to other assets required to generate the cash flows (contributory assets). The key steps of MEEM approach are:

i. Projecting the amount and timing of future revenues and expenses driven by the subject asset and related contributory assets.

ii. Identifying the contributory assets that are needed to achieve the projected revenue and expenses, which often include working capital, fixed assets, assembled workforce and identified intangible assets other than the subject intangible asset.

iii. Selecting an appropriate rate of return on each contributory asset based on its risk level.

iv. Deducting the required returns on contributory assets (contributory asset charge) from the forecast profit to determine the earnings attributable to the intangible asset only.

v. Selecting an appropriate discount rate for the subject intangible asset to determine the present value of the excess earnings.

The MEEM approach should be applied to a single intangible asset only for any given stream of revenue and income, generally the primary or most important intangible asset when more than one intangible asset is recognized. In the case where the brand name is not the primary intangible asset to a company, the MEEM approach is less appropriate as the valuation methodology of the asset.

Both the RFR method and the Interbrand method compare the subject brand name with the market by its strengths using indices or royalty rate, while the MEEM approach mainly focuses on the financial performance of the brand name. Nevertheless, it is important for valuers to first identify the objective of the valuation and then use the appropriate method and assumptions to determine the fair value of the brand name.

Source:
Best Global Brands 2018 Report by Interbrand and “International Valuation Standards 2017” issued by International Valuation Standards Council