Natalie Mizik and Robert Jacobson present a conditional multiplier approach for valuing branded businesses that enhances traditional multiplier-based valuation methods by explicitly incorporating brand characteristics into the model. Most valuation approaches hold that intangibles such as brand characteristics are already incorporated into multiplier analysis through their impact on contemporaneous accounting metrics. However, some of the effects of intangibles may be long term or may occur only in the future, and therefore may not be accounted for in contemporaneous accounting metrics.
Mizik and Jacobson hypothesize that brand assets have a direct impact on valuation multipliers and assess whether brand metrics provide incremental explanatory power to accounting metrics in explaining the enterprise value-to-sales multiplier. With a data set comprising a total of 1,244 pooled cross-sectional time series observations in the period 2000- 2006, and drawing on Young and Rubicam’s Brand Asset Valuator (Y&R BAV) database, they estimate the effects of five perceptual brand metrics: perceived brand differentiation, relevance, esteem, knowledge, and energy.
Their results indicate that valuation accuracy can be significantly improved by incorporating information about the properties of the firm’s brand asset into a valuation framework. In particular, their sector-specific models suggest that the brand metrics substantially increase predictive power. The authors find that brand metrics have different associations with the value-to-sales ratio across different industrial sectors: for the seven business sectors they examine, brand metrics reduce in-sample mean absolute errors from 2.4% in retail and apparel to 30% in consumer durable goods. Out-of-sample analysis shows that, when compared with predictions based on accounting variables alone, valuations that take brand metrics into account reduce the mean absolute error of predictions by 16%.
Because consistent measures of other intangible assets can be easily incorporated into their valuation framework, the authors strongly recommend further research to investigate the ability of other intangible assets, such as management quality, customer satisfaction, and measures of technological capabilities such as patents and patent citations, to improve the forecasting of business valuation.
About the authors
Natalie Mizik is the Gantcher Associate Professor of Business at Columbia Business School. Robert Jacobson is Professor of Marketing and Transportation at the Foster School of Business, University of Washington.
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