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Brands deserve the CFO's attention

Over the past twenty years, it has become increasingly evident that intangibles have monetary value just as other physical assets do. Often businesses such as consulting organisations, travel firms and internet based companies do not carry large amounts of fixed assets such as land, building, plant and machinery on their balance sheets. Apart from a few computers and office furniture, their main assets are people, knowledge and delivery mechanisms. These can frequently be replicated at prices far lower than their acquisition costs and yet their valuations are usually multiples of the total worth of fixed assets. The differential comprises the value of the organisation’s brand.

This raises the question, what really constitutes monetary value of something that is essentially intangible? A brand is a covenant with a customer, a promise that a product or service will offer or conform to a set of expectations that have been created over a period of time. Without such a commitment, it is no more than a name. One brand’s value differs from another in the manner in which customers perceive a differentiation in the product or service offering. For instance, a franchise of a global consulting firm may provide added confidence amongst customers of their ability to service their needs more appropriately, than perhaps a smaller local firm. This enables them to command higher fees and therefore much higher income streams. A hotel is essentially nothing more than brick and mortar, some furniture, equipment and people – essentially things that can quite easily be replicated. However, customers have preferences amongst hotel chains based on certain expectations being met – better standards of service, better food perhaps  which ensures a draw on customers, leading to future income. This again translates into monetary values that are much higher than those constituted by traditional components of fixed assets.

The concept of paying for something intangible came into reckoning over two decades ago when a series of acquisitions took place in Europe and America. Nestle acquired Rowntree for a large sum which vastly exceeded the value of its assets. Nestle was not paying so much for Rowntree’s manufacturing facilities nor indeed for its distribution capability. It had the wherewithal to reproduce Rowntree’s products and delivery mechanisms to reach consumers. It paid those sums because it believed that the Rowntree brand was popular and replicating this engagement with consumers would have, in the absence of an acquisition, taken a very long time. More recently Microsoft’s acquisition of Hotmail was based on a very similar set of considerations. Microsoft could quite easily have launched its own web-based email service and backed by its superior technological capability, may have offered something better. But Hotmail had customers that used its offering, trusted its service and this brought a value for which Microsoft was prepared to compensate.

Brands have a value because customers are prepared to pay a premium for their use. The challenge for CFOs is to determine how this value is measured and managed. This can be undertaken either at the corporate level (as in the case of value in the Tata brand) or at the product level. The inputs to assigning a value are usually the company’s financials; comparisons with industry norms (at the corporate level); and product profitability margins and customer surveys (for individual products). Product brand valuations are determined by the tangible value seen by customers whilst making a purchase decision (for instance consumers buy watches so they can read the time) and intangibles such as the intrinsic worth associated with a name due to things such as image, trust and reliability (for instance consumers by an Omega watch because it provides value much more than simply telling the time).

As custodians of a company’s assets, CFOs therefore have a responsibility for brands as much as they do for tangible assets and reputation. Increasingly, CFOs recognise their role as keeper’s of a firm’s conscience. They ensure that organisations operate within the framework of laws and obligations, so that their firm’s reputation and image remain unblemished. All of these affect the value of a company’s corporate brand and its stock price. Just as in corporate brands, a CFO’s involvement must remain in aspects of product brands too. They must participate in discussions that entail brand extension and leveraging strategies, even advertising and promotion because all of these may undermine or bolster the monetary value of this extremely important business asset. Currently, few CFOs concern themselves directly with matters that involve product brands and this amounts to a folly. Marketing professional are not the sole custodians of brand assets and their principal role is to leverage them to ensure higher income streams, often with an eye on the next quarter. CFOs on the other hand, whilst remaining concerned with short-term income streams, have a higher duty to protect and create value in brands as an asset class. This includes not only participating in discussions on brand strategy but also aligning incentives to maximise the value of the brand. Intangibles and brands are now worth much more than traditional asset classes and consequently deserve appropriate

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