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PWC Valuing Consumer Product Brands PDF
PWC Valuing Consumer Product Brands PDF
At a glance
Within the consumer
products sector,
brands are typically
the most significant
assets recognized in
acquisition accounting
under ASC 805.
Supportable valuation
and accounting for the
acquired brands is an
essential step in acqui-
sition accounting.
Valuation methodolo-
gies for brands may
vary, but all require
significant industry-
specific judgment and
expertise to ensure
supportable measure-
ment and to avoid audit
surprises and the risk of
restatement.
Introduction
For many consumer products companies, M&A transactions are often
driven by the underlying brands. New brands can help fuel global
expansion. On the flip side, brand divestitures can help hone product
portfolio growth and profitability.
However, brand-rich transactions can be fraught with accounting
complexities. The main reason is that the term brand typically
encapsulates multiple components above and beyond just simple
tradenames.
Planning brand transactions with a careful eye on the valuation and
purchase accounting issues can provide better insight into the potential
accretive or dilutive impact of a deal, help improve and streamline post-
deal accounting and even reduce the risk of impairment in some cases.
Overlooking the complexities can result in unwanted surprises, audit
delays and possibly even increased risk of impairment.
PricewaterhouseCoopers LLP 3
What did I buy? For example, assume you acquire
control of a group of assets. If
Purchase accounting first requires
you could generate a return with
determining whether you acquired a
these assets either in isolation or
business or simply an asset or group
by combining them with assets
of assets. The answer guides how
already owned or rented, a business
consideration is treated (as is the
combination would likely result. The
case for earn-outs) and the allocation
acquisition accounting guidance under
method. For example, only a business
ASC 805 would apply in this example.
combination can give rise to goodwill,
and only in an asset acquisition Acquisitions within the consumer
can value be recognized for an products sector typically involve the
assembledworkforce. transfer of not only brands, but also
additional assets such as an assembled
ASC 805-10-55-4 says that a group
workforce and manufacturing
of acquired assets can be considered
facilities. Therefore, most consumer
a business if the assets form an
products companies are able to
integrated set of activities capable of
generate a returneither from the
being conducted and managed for
assets acquired in isolation or by
the purpose of providing a return
leveraging the acquired assets along
to investors or other stakeholders.
with those assets already owned. Thus,
These criteria set a fairly low bar
these types of brand purchases often fit
for classifying a transaction as a
the criteria of a business combination.
businesscombination.
Although uncommon, certain brand
acquisitions may be viewed as asset
purchases rather than business
combinations. If, for example, the
only asset acquired is the rights to the
Potential aspects of a brand brand itself, the criteria of a business
combination may not be met. In rare
Trademarks circumstances, this conclusion could
Trade names result even if the acquired rights
included access to not only trade
Product formulations/recipes names and trademarks, but also
product formulations, advertising
Marketing materials materials or other components of what
is typically considered a brand.
Style guides
Determining what constitutes an asset
Websites and URLs beyond the brand can be subjective.
Clearly documenting exactly what
Unique packaging/tradedress
wasand was notacquired can
help determine whether the business
combination criteria have been met.
Acquired business
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Valuation methods In the consumer products sector,
determining the primary acquired
The methodologies used to value an
asset can be challenging. Both
acquired brand will ultimately depend
marketing-related intangibles (such
upon the components determined to be
as trademarks and trade names) and
included within its unit of account. The
customer-related intangibles (such as
two most common models for valuing
distributor relationships and retailer
marketing-related intangibles such as
relationships) can play key roles in
brands are:
driving product sales.
1. the Excess Earnings method and
The Excess Earnings method and
2. the Relief-from-Royalty method. the Relief-from-Royalty method
can, at times, result in different
These two methods are forms of the values. Therefore, the selection of
Income Approach, in which value is the appropriate methodology can
equated to a series of cash flows and have a meaningful impact on the
discounted at an appropriate risk- ultimate valuation and ongoing
adjusted rate. The Excess Earnings amortizationexpense.
method calculates the value of an asset
based on the expected revenue and To that end, an in-depth understanding
profits related to that asset, less the of the landscape in which the brand
portion of those profits attributable competes and the key revenue drivers
to other assets that contribute to the is needed to select an appropriate
generation of cash flow (e.g., working valuation methodology for each
capital, fixed assets, assembled acquired asset. Additionally, because
workforce, etc.). The Relief-from- the two valuation methodologies
Royalty method, on the other hand, have different inputs, the disclosure
is based on a hypothetical royalty requirements can differ as well,
(typically calculated as a percentage something appraisers and filers need to
of forecasted revenue) that the owner consider when selecting an approach.
would otherwise be willing to pay to
Analyzing the promotional strategy
use the assetassuming it were not
of the acquired business is one way
already owned.
to determine the most appropriate
In theory, the two methods should methodology for acquired assets. As
arrive at the same value. However, an example, brands themselves are
valuation specialists will typically often deemed to be the primary asset
reserve the Excess Earnings method for pull market productswhich
for intangible assets deemed to be the distributors and retailers often feel
primary driver of profits. The Relief- pressured to carry because of high-
from-Royalty method is often used end customer demand. On the other
for intangible assets deemed to be of hand, customer relationships are often
secondary significance. primary for push market products for
which significant promotional effort
is usually required to gain shelf-space
with distributors and retailers.
PricewaterhouseCoopers LLP 7
Alternative valuation
The use of simplified rules of thumb may lead to approaches
inappropriate conclusions and create significant
Income-based methodologies are
hurdles during an audit or regulatory review. most prevalent in the valuation
of marketing-related intangibles.
However, certain aspects of a brands
value can, at times, be estimated with
Upfront fees or ongoing cost but the same company or another in alternative approaches.
sharing. Licensees who are willing the industry earns only 12% on the
to pay an upfront fee or share in sale of otherwise substantially similar A Cost Approach may be most common
future marketing or advertising unbranded products. The difference of for brand components that can be
expenses may be able to negotiate a 8% could be viewed as the incremental readily reproduced, such as product
lower royalty rate. profit associated with the brand. formulations. Even trade names can, in
certain rare instances, be valued with
These issues are just a sampling As an alternative analysis, start with such an approach if they were recently
of those required to properly the overall operating profit margin of launched and have not yet been
identify and analyze comparable the business and subtract returns for established in the marketplace. Again,
licensingtransactions. activities not specifically related to the the distinction between push and
brand. Such activities may include the pull marketing may help guide the
The use of comparable agreements is
manufacturing, selling and distribution decision as to whether a Cost Approach
one source of royalty rate information,
functions, among others. is appropriate, as the cost to replicate a
but a number of alternative approaches
name or mark is a more relevant metric
also exist. One popular technique, Representative returns for these for push marketed products.
often referred to as the Profit Split non-brand functions can be gleaned
method, attempts to isolate the from margins earned by outsourcing Although extremely rare, a Market
proportion of a companys profit companies that perform these Approach can be considered to value
margin that can be specifically functions in isolation. Once the returns the components of a brand that have
attributed to the brand itself. for these functions are subtracted an active market. In each instance,
from the overall profit margin, the acquirers should carefully consider the
Valuation practitioners often use
remaining profit can be viewed as facts and circumstances surrounding
a number of rules of thumb to
a proxy for the incremental margin the transaction at hand.
determine this proportion, but these
attributable to the brand itself. The
shortcuts do not typically stand up well
result can form the basis for selecting a
to scrutiny by auditors and regulators.
royalty rate.
Rather, acquirers should consider more
case-specific information in making Selecting an appropriate royalty rate
these determinations. for use in the Relief-from-Royalty
method can be complex and requires
Comparing profit margins for branded
significant valuation and industry-
products relative to generic, or
specific judgment and support. While
unbranded, products is one way to
common in practice, the use of broadly
determine the profit associated with
comparable licensing transactions or
a brand. For example, consider a
simplified rules of thumb may lead to
company that earns an operating profit
inappropriate conclusions and create
of 20% on its branded product sales
significant hurdles during an audit or
regulatory review.
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Useful lives and is the key criterion for such classifica-
amortization tion. Well-known brands within the
consumer products sector often meet
Economic and useful lives are key
this hurdle, as companies usually
inputs into both the valuation
expect to continue supporting these
and subsequent impact to
assets with ongoing marketing efforts.
income of acquired assets. Key
considerationsinclude: The factors that impact the
amortization period of an asset
The period over which the asset
are similar to those that should
is expected to be used and to
be considered in determining the
contribute to cash flow
economic life of the cash flows used
Any legal, regulatory or contractual to value that asset. For that reason,
provisions that may limit the companies will typically look to the
usefullife period over which the cash flows used
in the assets valuations are forecast
Historical experience in the use of
to select an appropriate amortization
similar acquired assets
period or indefinite-life classification.
The impact of anticipated changes
in consumer demand and tastes Reconciliation (but not necessarily
as well as other economic and equivalence) between the valuation
industrytrends forecast term and the amortization
period is often required in the eyes of
The level of expenditures (including
auditors and regulators. The selection
ongoing marketing and advertising)
of the appropriate amortization
required to maintain the asset
period can play a large role in post-
The life of other related assets deal dilution. Therefore, acquirers
and valuation specialists should
Furthermore, acquirers should
strongly consider the interplay
consider whether any of the
between the valuation assumptions
acquired assets qualify for indefinite-
and the resulting impact on ongoing
lived treatment under ASC 350,
netincome.
IntangiblesGoodwill and Other.
Having no foreseeable limit to the
Impairment testing
period over which the asset is expected
to contribute to the entitys cash flows Supportable initial valuations and the
selection of appropriate amortization
periods (or determination of an
indefinite life) are critical not only for
post-deal dilution analysis, but also
Acquirers should exercise as much foresight as for ongoing impairment testing. The
possible at the initial measurement date to set initial assumptions and methodologies
a robust framework for impairment testing in used to value an asset in purchase
future periods. accounting typically form the basis
for how that asset is assessed for
PricewaterhouseCoopers LLP 11
www.pwc.com/us/deals
Mark Ross
Partner, Deals
West Region Leader
(415) 498 5265
mark.ross@us.pwc.com
PwC provides tactical and strategic thinking on a wide range of issues that affect the deal community.
Visit us atwww.pwc.com/us/deals to download our most current publications.
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