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A business in any market structure is normally known by its brands. A brand is an identity or name of a product in a market. It is an intangible asset of the company manufacturing it. A brand name makes it easier to differentiate products especially when a single company manufactures a large number of products.
Every brand has a value depending upon its success in the market. The value is estimated through a process known as brand valuation, which is a very important financial component of mergers and acquisitions. As every brand is unique, it is difficult to lay out a single, standardized mathematical method for all types of valuation. Therefore, the greatest challenge is to eliminate subjectivity as much as possible to arrive at an objective brand value.
The three main approaches toward brand valuation are:
Economic Income Approach - Under this approach, the future economic benefits from the brand are discounted to its present value using various discounting methods. Deciding the discount rate and the tenure is important to derive realistic results.
Market Comparable Approach - As the name suggests, a brand is compared with other brands under the same product category using various financial ratios like P/E ratios and turnover ratios.
Cost Approach - It simply involves adding up the cost of different components used in creating the brand. The components, for instance, can be advertising cost, research cost, manufacturing cost, etc.
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