By Robert Russell (Manchester), Rowan Aspinwall and Emily Leach (London)
The fashion industry is not impervious to the threats presented by changing consumer behaviour, vulnerable economic conditions and resource scarcity. It is a turbulent time for fashion retailers, who can suddenly find themselves in financial distress somewhere on a spectrum between a simple refinance or reorganisation and a formal insolvency process.
A successful brand is vital in the fashion industry and can be leveraged to realize value when a business is in financial distress. Brand value can exist in a multitude of (sometimes hidden) places – for example, a customer database, an inactive domain name, a trademark registration, or an archive of design material.
In distressed situations, there is often a significant disconnect between the value of the retailer itself (i.e. the corporate vehicle and/or the business and assets) and the value of the retailer’s brand in isolation. While a retailer itself may be suffering, the value of its brand may remain proportionally unaffected. Even at the point of insolvency, which may be perceived by many to mean the end of a business, a retailer’s brand can present significant opportunities for competitors and/or new entrants to the market and so generate value to the insolvent retailer or its creditors. It may be difficult for a new retailer or startup to amass goodwill in a brand on its own and being able to sidestep this process by purchasing a recognized brand can be hugely attractive.
For retailers at the less distressed end of the spectrum, a brand can increasingly be used as collateral for asset-based loans. Lending on intellectual property has gained prominence in recent years, as world economies have evolved from an industrial base focused on physical assets, such as property and equipment, to economies that recognize the value of intangible assets. What once was included as mere cushion in a security package to supplement the value of tangible assets is now a primary asset securing many loans.
In addition to asset-based lending, distressed retailers can look to an established and growing stable of buyers who acquire brands for the sole purpose of licensing the trademarks attached to them. Buyers will look to acquire or invest in:
- Under-exploited intangible assets from a retailer who possesses brand recognition in its sector; but is experiencing challenging operating performance;
- A neglected brand owned by a retailer, which does not fit its business objectives; and/or
- A dormant brand that is established, but which the retailer has since discontinued its marketing and distribution efforts in respect of the same.
A growing pool of capital chasing a limited number of brand opportunities has pushed brand values upward, presenting significant opportunities for distressed retailers.
At the most distressed end of the spectrum, the insolvency of an established business is increasingly seen as a strategic opportunity for third-party buyers. Brand value is considered so difficult and costly to establish that buyers are looking to insolvent businesses to acquire valuable intellectual property without paying the premium that might apply in a solvent purchase.
Whether a retailer is in financial distress or not, the general principles and approaches that apply to valuing a brand are similar The process is sometimes seen as more of an art than a science, but is becoming increasingly more sophisticated. The principal methods used to value a brand are:
- The cost approach, which looks at the costs to reproduce or replace the brand being valued. The replication cost would be the cost of developing the intellectual property to the same state it is in today, including the costs of labour, materials, overhead and capital charges (adjusted for inflation).
- The income approach, which focuses on future income streams and calculates the future discounted cash flows allocated to the brand, such as gross and net sales from products incorporating a particular piece of intellectual property, or revenues generated from licensing the intellectual property over its remaining economic life.
- The market approach, which considers transactions involving comparable forms of intellectual property and related licensing arrangements and royalty rates. Value is calculated by comparing the price at which similar property has been exchanged on the market.
However, retailers should be mindful that the value of a brand is not static and, in a distressed scenario, a discount will often be applied when valuing a brand, to reflect the financial distress of the retailer.
At the more distressed end of the spectrum, the impact (and associated adverse publicity) of an insolvency on customers, suppliers and employees can quickly erode brand value.
A successful brand can increasingly be leveraged to realize value when a business is in financial distress. Even at the point of insolvency, situations of financial distress can present opportunities to extract brand value for both distressed owners of brands and those wishing to acquire a brand.