The power of a brand name

I am sorry about the long hiatus from posting but I was at Disneyworld last week with two of my children. As we wandered from one line to another, frantically collecting fast passes along the way, I perused the merchandise that I passed by and pondered the power of a brand name. Every conceivable item that can be fashioned into Mickey Ears has been, from T-shirts to mugs to waffles. And once the Mickey logo is put on a product, the price takes a quantum leap upwards.

To me, this captures the power of a brand name. Stripped to basics, it allows you to charge a higher price for exactly the same product. Very few companies have this type of power, and if they do, it clearly pays off big time in pricing power.

What are the implications for valuation? A brand name company will have a higher value than an otherwise similar company (same products, same total revenues) without the brand name. Note, though, that I am not suggesting that we attach brand name premiums to intrinsic valuations as I have seen some people do. If you do your discounted cash flow valuation right, the brand name should already be embedded in that value. It is in every input in the valuation from base year profits, to margins to returns on capital to value. Adding a premium to a discounted cash flow valuation usually results in a double counting of the brand name value.

I have watched with some trepidation the attempts by accountants to try to put brand name value on the balance sheet, In fact, I have a paper on valuing brand name and other intangibles that you may find interesting:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1374562

I value Coca Cola's brand name value in this paper and develop general frameworks that can be used to value several categories of intangible assets. More on brand name and the consequences for corporate finance and valuation on the next few posts.