Written by Sydney Richards, CVA; Erica Veri
The value a brand brings to a strategic partnership is overlooked in many healthcare joint ventures and affiliations. However, healthcare brands may have a significant impact on a partnership’s success. Healthcare brands can suggest top outcomes to communities in the face of intense competition, attract and retain leading providers, and evoke a sense of loyalty and trust among the patient base. In many joint ventures and partnerships, completing a brand valuation allows the licensor to receive a financial return for their contribution of this important asset. Below, we outlined important factors that may be considered in a brand valuation.
License Structure and Terms
Healthcare brands are commonly contributed to a partnership through a license agreement. The structure and terms of the brand licensure can significantly influence the value. For example, a brand license agreement may stipulate payment terms, which can be structured as an upfront equity in a partnership, a fixed annual payment, or a variable (royalty rate) payment. These terms can have a significant impact on how financial risk is or is not shared between the parties, especially for partnerships such as de novo joint ventures. The license agreement can also specify the duration of the brand contribution and specify whether the rights to the brand are exclusive to the proposed licensee or whether the licensor may enter other brand contributions simultaneously.
Brand Strength, Recognition, and Positioning
From the licensor’s perspective, extending the use of their brand to a partner can offer an opportunity to access a larger patient population without sizable investment in capital and infrastructure. A licensor also gains the opportunity to monetize the positive reputation associated with its brand, which has often been built over significant time, investment in expertise and care quality, and marketing spend. While these historical costs may be difficult to quantify, the quality and strength of the brand, especially as compared to peers, can and should be considered in a brand valuation.
One of the ways the brand strength, recognition, and positioning can be considered in the appraisal is through a “with and without” analysis, which seeks to quantify how forecasted earnings would differ for an opportunity with vs. without using the brand. These earnings can be impacted by items such as speed to ramp up for partnered de novo ventures, increased occupancy or utilization due to the community’s association of the brand with high quality care, margin effects of greater economies of scale, or even a favorable payer mix shift.
Additionally, other benefits may be captured in the with and without analysis, including access to clinical integration, clinical trials and research, facilities and equipment planning, and recruiting. If the licensee is a smaller entity with less market share than the licensor, it may desire to leverage the branding entity’s experience and knowledge of best practices while conveying the expertise and reliability of the larger brand to the patient population.
Cost to Replicate or Replace
The cost to replicate considers what it may cost to develop and maintain a comparable brand. While many retail brands communicate price and prestige, healthcare brands typically emphasize a company’s quality patient service, positive outcomes, and reliability. A healthcare brand can also attract physicians and help in retaining talent. These qualities may take years, even decades, to develop. While there are certain quantifiable measures that can be included in a brand appraisal, such as advertising and marketing spend to build and maintain a brand, it can be difficult to measure the true costs to replicate brand value for many healthcare brands. Additionally, unless the licensee can generate a return on these costs, it would not be reasonable to assume they would be willing to pay for all historical costs unrelated to a particular licensing arrangement. As a result, this approach is commonly considered but may not directly drive a value indication for the specific payment a licensee should make for the use of the brand.
Licensee Financial Performance
A licensee’s financial performance may have a material impact on the amount it can expect to pay in a licensing arrangement. Factors such as business stage (start up, growth, or mature), subindustry, margin, and operational capacity or constraints can directly impact the ability of a brand to drive incremental earnings to the licensee through use of the brand. A brand valuation for a license payment between two entities commonly includes a thorough examination of the licensee’s position in the local and greater market, performance compared to peers, and outlook.
Comparable Transactions
There are numerous market sources for brand valuation comparables. While commonly considered and thoroughly analyzed, due to the uniqueness of each licensing opportunity, many lack direct comparability to the royalty rates published in publicly available databases, such as MARKABLES, ktMINE, and Scope Research. To the extent that there are brand comparables, a brand valuation should consider reasonable market ranges for similar assets and transactions.
The VMG Health Advantage
Compared to many healthcare business or other asset valuations, healthcare brand valuations can be difficult. There can be uncertainty (and differences of opinion) on the go-forward impact a brand may have on a business. Although there are established general market ranges within healthcare segments, there are less direct market comparables compared to other partnership contributions, such as business equity or real estate value, for brands. With VMG Health on your team, you can expect the quality, responsiveness, and expertise your brand deserves to overcome these hurdles and drive a successful brand contribution and lasting partnership.
