United States: How Much for the Brand License?
Valuation of Brand Extension License Opportunities

Originally published November, 2003

Hundreds of new trademark license agreements are developed each year. Corporate or brand extension licensing is visible in more categories than ever before. Given the value of many brands being licensed, use of an effective valuation methodology for brand extension licenses is important for licensors and licensees.

Numerous studies indicate that brands provide greater value than other corporate assets. Perhaps best known is the "Global Brands" study conducted by Interbrand; it concludes that brands account for more than a third of shareholder value (on average), and in many cases, more than 70% of shareholder value.

Today, there is a consensus among many academics, analysts and marketers that a strong brand can provide powerful competitive advantages such as greater customer loyalty, higher margins, and opportunities for brand extension and licensing.

The recognition that brands are a powerful yet often underutilized asset is why trademark licensing has become a popular marketing strategy. Because many brand owners don't have the resources to capitalize on all viable business opportunities, they utilize trademark licensing to enter new markets beyond their core competencies.

Brand extension licensing (i.e. licensing the brand in new product categories) allows companies to obtain even greater ‘leverage’ from their brand assets. For the brand owner or licensor, brand extension licensing provides royalty revenue and a variety of brand benefits. For licensees, licensing a strong trademark can provide high consumer awareness and a clear, appealing image for their products.

Although a brand extension license relationship may offer significant benefits to both licensor and licensee, determining the value of the license and gaining agreement on the terms of the license agreement can be quite challenging.

Unfortunately, valuation methodologies that focus only on financial metrics or comparable transactions are not adequate to determine the value of brand extension license opportunities. Brand is important, however, the licensor’s operations and stakeholder relationships can also have significant value to the licensee and need to be considered. In addition, the value must be determined in the context of an individual license‘s business.

The Brand License Valuation TM (BLV) provides a solution to the limitations of traditional valuation methodologies. The BLV model brings together brand metrics, market analysis and finance to accurately assess the value of brand extension licenses. Importantly, this model is dynamic and factors variable licensee business objectives, needs and resources.

The BLV methodology reflects the licensor’s brand, marketing, operations and stakeholder relationships as well as the capabilities and interests of each licensee. Uncovering the needs of qualified licensee candidates and identifying how the brand license can meet their needs are at the heart of the valuation.

The BLV model assesses two key dynamics: ‘brand fit’, which reflects category dynamics; and ‘business fit’, which reflects licensee dynamics. The BLV model, including valuation and development of license terms, is based upon several premises:

• Brand health and support are key drivers of value. Brand image is a key element that should be evaluated among several stakeholder groups.
• Licensor stakeholder relationships influence value. These relationships can add or detract from the value of a brand extension license opportunity.
• Licensee candidates are unique and have different business objectives and resources. The license terms should reflect the value of the brand license in meeting individual licensee business objectives.
• Brand license value is dynamic and variable. A strong brand can have significant value, but not if it compromises a licensee’s existing or future products and marketing programs.

Business valuation grew out of traditional valuation methods applied by accounting firms. These firms have a financial orientation and do not have the experience to understand how brands operate within a competitive context. Several traditional methodologies have been adopted for valuation of brands and other intangibles, but results have not been very useful or satisfactory.

Today, a widely accepted method of valuing a company or business is to discount the profit or cash flows it produces to a net present value. However, there is a growing consensus that financial measures alone do not provide a complete picture of the strengths and weaknesses or value of a business.

According to Gartner, ‘The lack of generally accepted standards to measure knowledge management and other intangible asset classes will continue to erode the relevancy of accounting-based information in deciding where to find and how to build business value (0.8 probability).’

Value is a concept with many interpretations. The value of the brand extension license must be considered based upon the use of the brand for a line of products or services. There are two popular methods that have been adopted by licensors for this purpose:

• Market-based valuation – uses "comparable" trademark license opportunities and/or historical market transactions
• Income-based valuation – establishes a sales target, then applies a royalty rate to determine the licensing fees or ‘royalty minimums’ to be paid by the licensee

The above valuation methodologies revert to traditional measures that have not kept pace with the real drivers of business value, and they are not capable of reflecting the benefits created by unique trademark licenses. These methodologies also lack the ability to consider how value changes based upon the business objectives of different prospective licensees.

The value of a brand extension license is determined, to a large extent, by the ‘business fit’ with a given licensee. Value must reflect the benefits conveyed by the license to the licensee. These benefits can be categorized as the licensor’s brand, marketing programs and stakeholder relationships. Measuring the value of these benefits or business fit must be done in the context of a given licensee’s business.

In developing a brand extension license valuation model, it is important to reflect the key differences between conventional and brand extension licensing.

Conventional licensing involves trademark imagery and affinity. Typically, there is little or no transfer of the licensed trademark or brand product attributes and consumers are not often very concerned about the origin of the products.

Brand extension licensing involves products where the brand image and association with the brand owner are the primary drivers in the consumer purchase decision. The objective of brand extension licensing is to develop product categories with a strong brand connection or ‘brand fit’ that is logical, relevant, and appealing to consumers.

The valuation of brand extension licenses requires a different orientation versus conventional licensing because the consumer purchase decision is very different and the integration with the licensee’s business is often greater. A useful methodology must reflect these dynamics to accurately reflect value for the brand extension license.

The Brand License Valuation TM (BLV) model brings together brand metrics and market analysis to assess the value of brand extension licenses. ‘Brand fit’ (reflecting category dynamics) and ‘business fit’ (reflecting licensee dynamics) are the two underlying principles in the determination of license value.

The BLV model assesses how the licensor’s brand and business assets (‘licensor assets’) affect brand fit and business fit for a given licensee. These licensor assets include:

• Brand - brand name, logo, slogans/tag-lines and brand image
• Marketing - communications, media and support level
• Operations - product development, manufacturing, and distribution
• Stakeholder relationships - consumers, retailers, employees, other licensees

Implementation of the BLV model requires data inputs from both licensor and licensee (e.g. brand, marketing, customers, channels, competition). There is a five-step process:

1. Conduct a licensor business audit – evaluate the licensor’s brand and identify licensing related assets
2. Conduct a market analysis – assess product categories using a screen to evaluate category value and product appeal.
3. Assess the License Value Drivers (LVD) – determine the presence and importance of brand fit and business fit
4. Determine license value – assess LVD elements for qualified licensee candidates
5. Create the license proposal –develop a business case and proposal that delineates key business terms or licensee performance commitments

Although securing relevant information can be a challenge in any business analysis, the licensor can realize significant benefits from making this effort and using the BLV process to determine the value of brand extension licenses.

About Goldmarks

Goldmarks (www.goldmarks.net) is a consultancy that specializes in brand extension licensing. Founder Kirk Martensen has assisted a diverse range of licensors (e.g. DuPont, General Motors, Jack Daniels, Motts, Maytag and Nabisco) to develop successful brand extension licenses with leading manufacturers (e.g. Eureka, Fedders, HJ Heinz, Proctor & Gamble).

goldmarks and Brand License Valuation are service marks of the Goldmarks Company.