Brands have always been an integral part of the consumer product economy, but what about brands and high finance?  What about brands divorced from their underlying products?  Could the brand itself -- an intangible asset -- be thought of, managed, and traded as a distinct asset without all that inventory, distribution and overhead?  Sure, the brand was always there . . . mixed in with all that goodwill, "boot" collateral to asset-based lenders and inextricably tied to the product or service.  But now, the brand itself is increasingly becoming the focus of a select group of transactions.

The growth of these "brand-centric" transactions is having a profound impact on the valuation of brands.  Historically, most appraisers have had to rely on numerous assumptions and the weighting of distantly related data to determine values.  Fortunately, now with more firms actively involved in the purchase, sale and licensing of brands, there are more relevant benchmarks available from those firms straddling both brand transactions and brand appraisals.

Market information derived from recent transactions has always been the fundamental underpinning of appraisals of similar assets.  This methodology has always held for hard assets like inventory and is no different for intangible assets like brands.  For example, here at Gordon Brothers Group, we recently purchased the Rugged Shark^® marine shoe brand and were able to leverage that transactional expertise into a subsequent brand appraisal.

While strategic buyers have always been interested in purchasing brands -- usually along with the rest of the business or product line -- only recently has the market for firms interested in buying the brand solely for licensing purposes truly accelerated.  These firms, including Gordon Brothers Group, are typically structuring conventional licensing deals with manufacturers or distributors or going directly to retailers and cutting retail-direct licenses, both with guaranteed royalty minimums.

There are a few key market factors underlying this change:

• With the proliferation of product choices, consumers are placing greater value in brands to narrow their purchase decisions

• New brands are hard to trademark and register, making existing and tested brands attractive

• Retailers are shifting toward purchasing or licensing existing brands for their private-label programs instead of creating house brands from scratch

• The US manufacturing sector continues to shift sourcing most consumer products overseas, further isolating brands from operations or inventory

• A frothy lending environment and growing second secured lending market are isolating brands as specific collateral

• Brands, as a distinct asset, are sometimes worth more broken apart from related assets with lower multiples

Brand purchase prices are being calculated using multiples of the estimated future guaranteed royalty cash flow, shortcutting the typical "relief from royalty" model characteristic of most theoretical brand appraisers.  This difference is important to appreciate.  While the basic tenants of the "relief from royalty" model are still valid, often the model assumptions no longer accurately reflect the bid behavior of the firms now vying to purchase brands for licensing purposes.

The world of brand valuation is changing, especially in determining the Net Orderly Liquidation Value of brands.  Lenders should be wary of solely theoretical approaches to brand valuation and seek out appraisers who leverage their own brand bid analysis to determine value.