INDUSTRY INSIGHT
BUSINESS VALUATION
UPDATED SEPTEMBER 2016
BRANDS
CURRENT TRENDS
The emergence of brand acquisition, licensing, and management
companies has created significant liquidity in the market, creating
increasing opportunities for secured lending.
The current retail market conditions have resulted in an uptick in
brand transactions.
Brand acquirers are generally focusing on wholesale instead of retail,
as licensing retail locations in the U.S. is generally not an option, and
retail sales can be difficult to convert to wholesale.
PROJECTED VALUES
(12-MONTH OUTLOOK)
DECREASING
STABLE
INCREASING
BY THE NUMBERS
50%
led or supported half the mid-market
brand licensing conversions in the past
five years
All
experienced in valuing all facets of the
intangible asset base
50 +
PROPRIETARY DATABASE OF OVER 100 BRAND
TRANSACTIONS AND OVER 800 TRADEMARK
LICENSING AGREEMENTS
3
continents
worked on brand transactions in
North America, Europe, and Asia
appraised more than 50 different types
of intangible assets
NOTE: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE
MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE
FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN
ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND
THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT
REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY,
INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2016 GORDON BROTHERS GROUP, LLC.
GORDONBROTHERS.COM
+1.617.422.3233
Strong brand collateral is
differentiated, meaning it is distinct from competitors’ products
or services. As the product or service becomes more different,
categorization becomes more challenging and draws fewer
comparisons with its competition. An excellent example is Airstream,
whose iconic RVs are a cult classic. Its products look distinct and, as
a result, its brand is one of the most recognized on the road. This not
only promotes sales but also improves profits as highly differentiated
brands can charge a premium for their product or service.
Strong brand collateral also maintains a high level of consumer
awareness, meaning it is recognized and correctly associated with
a particular product or service by potential customers. Brands such
as Apple and Disney are renowned worldwide as innovative and fun
companies, and their products and services are uniquely sought after
by consumers. This brand awareness contributes to sales and value.
ASSESSING BRAND COLLATERAL:
Another important consideration is whether there is retailer and/or
distributor support of the brand. Brands with strong relationships
in this area are more resilient and better positioned to withstand
downturns. Retailers and distributors will do more for brands that
are highly integrated with their businesses such as co-op marketing,
discounting or handling returns. Strong retailer support can often
convey more brand value than a strong company-owned retail chain
due to conversion considerations. Beyond that, it’s important to
consider whether that advantage appears to be sustainable relative to
the competition.
Given all of the above, the most important question is whether a
third party will pay to either license or acquire the brand. In short, it
must have value to another party. When valuing brands, appraisers
typically utilize some form of the relief-from-royalty method, an income
approach that uses market-based data (when available) to calculate
the present value of hypothetical royalties an owner would otherwise
be willing to pay to use the asset. The model considers what revenue
could be generated from setting up a business (with no other assets)
to license the brands. Differentiated brands with high consumer
awareness and strong retail/distributor relationships as well as strong
margins are typically the best collateral. It is important to note that
the value of a brand to a financial buyer can often be materially
different from the value of a brand to a strategic party or competitor,
as they may value the brand based on other mandates or synergies
that are not captured in the value of the cash flows generated by the
brand.
The value
ascribed to brands by Gordon Brothers is a financial one; therefore, the
financial performance of the company is the baseline for establishing
value. Declines in sales and profitability have a direct impact on brand
value. Gross margins, in particular, are relevant because they inform
the hypothetical royalty rate that the brand would be able to command
to licensees. Declines in margins reduce what the effective royalty
rate could be, reducing value. Any existing license agreements where
the company rents the brand out to other parties are of particular note
here, and changes in those agreements are also key points to monitor
as they represent strong evidence of how the brand could be licensed
in a hypothetical transaction. Lastly, changes in interest rates are
worth monitoring as changes in market conditions can have an impact
on the return requirements investors would have for the brand.
COLLATERAL MONITORING HAS UNIQUE CONSIDERATIONS:
Brands can take time to ‘restart’ postliquidation. While their value is more durable than hard assets from
an obsolescence factor and they have longer economic lives, it can
take time to generate cash flows on brands subsequent to acquisition.
When executed successfully, brand transitions happen quickly and
can occur in less than six months. For example, Sycamore Partners
purchased women’s apparel and accessories retailer Coldwater Creek’s
intellectual property out of bankruptcy and re-launched as Coldwater
Creek Direct, a catalog and online-based business. The process took
only five months from purchase to launch. By compressing this
timeframe, Sycamore Partners was able to leverage existing consumer
awareness and transition loyal customers to its new platform,
capitalizing on brand value.
STRONG BRANDS ARE DURABLE:
Given the
intangible nature of the asset, brands can be tricky to liquidate.
Brands that are liquidated are generally bought out of Chapter 7 or
11 bankruptcy. The acquirer buys the trademarks along with any
marketing assets, style guidelines, formulations, domains, mastheads,
and other direct related assets and re-registers them for the
appropriate jurisdictions. In practice, brands are often acquired as part
of a pool of assets including inventory and other hard assets in these
transactions. Because this market is not as robust and established
as it is for other hard assets, it is important for lenders to choose
appraisal firms that have a strong history of buying and licensing
brands. Gordon Brothers brings decades of acquisition and brand
building experience to our appraisal methodology.
OPAQUE MARKET UNDERSCORES NEED FOR EXPERIENCE:
VALUE APPROACH
While secured lenders typically rely on Net Orderly Liquidation
Value (“NOLV”), Fair Market Value (“FMV”) may also be given
additional consideration by second secured or mezzanine
lenders who would consider a strategic sale for an exit
strategy. The appraised value of a brand is tied to revenue and
a corresponding hypothetical royalty stream. Brand values
are primarily developed utilizing some form of the relief from
royalty method, a subset of the income approach. The relief
from royalty method applies a discount to projected royalty
cash flows commensurate with risk.
NOLV may vary significantly depending upon a company’s
business model and brand-specific characteristics. It
assumes that the brand is sold (generally in a 363 sale) as a
stand-alone asset, separate from inventory or other company
assets. Therefore, there is a period of disrupted cash flows
as the hypothetical licensees need to resource and resell the
branded product. This also results in potential loss of sales. For
example, certain wholesale customers may never be regained
and retail sales may be eliminated as the company-owned
stores are closed. How the historic sales channels of the brand
convert in this type of sale can vary significantly.
FMV is generally a more hypothetical exercise that
contemplates the value of the brand to licensees within the
context of the current company operations as a going-concern.
Brand FMVs are generally more directly similar to traditional
relief from royalty models.
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