Brand equity: How to calculate the value of your law firm's brand

When preparing for strategic changes that involve external investment, rebranding or a merger, quantification of the value of your law firm's brand, along with all intangible assets and goodwill, is key to making well-informed decisions.

Many corporations view their brand, intangible assets and goodwill as more important than their tangible assets. This is especially true for law firms; a firm's brand is a key differentiator and contributor to the creation of a more profitable business. Not only is a law firm's brand highly valuable, it will be significantly affected by big strategic decisions. In the case of a merger, a firm's brand value could dramatically change by joining forces with a strikingly different firm.

Valuation methodology

The methodology used to calculate the value of a brand, its intangible assets and goodwill is involved, challenging and subjective. Although specific application in particular circumstances will differ in practice, the following three conceptual approaches and frameworks are widely adopted and accepted for brand valuation.

1. Income-based approach. This approach estimates future economic benefits or cashflows attributable to the brand, which are then discounted for the time, value of money and risks involved to the present value.

2. Market-based approach. This approach focuses on comparisons with market transactions involving selling, buying, franchising or licensing brands to derive market-based indicators of value.

3. Cost-based approach. This approach values the brand using the sum of
   the costs incurred in the creation
   of the brand or its replacement with
   an equivalent.

These three approaches are conceptually different but often used in combination or as cross checks with each other. Within this framework for brand valuation, the income approach is generally the primary method, as it is aligned with the basic premise of commercial value, which is the anticipation of future economic benefits. The market and cost-based approaches
are generally used as cross checks or support either in total, or for value components or drivers.

Within this framework for brand valuation, there are two key inherent difficulties:

1. forecasting into the future; and

2. benchmarking being limited by the unique nature of valuable brands and the lack of information published on brand value indications from market transactions.

These difficulties do not prevent a brand valuation. Rather, they give the opportunity to draw together critical brand and business information in order to give well-informed analyses. It is vastly preferable to have these analyses to hand than to proceed without them.

Forecasting is much assisted by
a process based on in-depth analysis into customer and stakeholder perceptions and market mapping. Benchmarking and making comparisons with market transactions is assisted by the extent of information now available to researchers.

Such valuable information, together with meaningful financial and functional analysis, often focuses the spotlight on the importance of brand compared with other business assets. Without a brand, a business might find itself selling a commodity at the lowest price and finding that there is always someone able to sell that commodity for less.

Even though brand valuation is involved and subjective, it becomes easier to appreciate with strong supporting business evidence and analysis. However, the analysis and conclusions reached still need to be commercially balanced, realistic
and consistent.

The power of partners

The ability of UK law firms to have non-lawyer ownership makes the potentially adverse effect on brand value when
a partner moves or retires more apparent. Individual lawyers are adept at creating and managing their own personal reputations and brands. They are often the face of the law firm's brand to many clients. Therefore, if and when they decide to leave or retire, this can negatively impact the brand and
its value to clients.

Intra-team collaboration to ensure the firm as a whole better serves the needs of its clients (rather than allowing partners to hoard client accounts) can help to ensure the firm's brand value grows. This will also reduce the likelihood of damage to brand value when individual lawyers retire.

The question is, should departing partners be given a cash payout for the goodwill they created during their time with the firm? The typical partnership model is based on capital contributions on admission to the partnership, excluding brand and goodwill value. Throughout their time at the firm, partners will share in the firm's profits, including those attributed to the brand. However, when they leave, partners will not be given a cash payout
for goodwill.

There have been other models, based on pension arrangements for example, but the 'zero-in, zero-out' model for goodwill has been widely adopted in partnership agreements. There have also been instances where brand and goodwill value has been taken into account, for example where there is no partnership agreement excluding it.

In most cases for long established and large firms, the founding or name partners no longer work there. Therefore, distinguishing the firm's brand from the individuals it has been named after is crucial. From a corporate point of view, a firm will want to distance its brand from individuals as much as possible. Therefore, it is now relatively rare that a named lawyer would expect a cash payout on the goodwill they created up until the time they leave or retire from the firm. Nevertheless, it might still apply to some more recently-founded boutique firms with strong reputations in their specialist areas.

In today's climate when law firms understand the relevance and impact of brand value, the 'zero-in, zero-out' model may be outdated, as it was derived on a basis that no longer applies given that the owners no longer all join, work in and then leave business at retirement. This model really derived from practical considerations involving new partners' ability to pay for brand and goodwill given its significance,
as well as the difficulties in quantifying it.

If a partner has joined a law firm and contributed to the building of its brand value for many years, it could be reasonably concluded that he is owed for his contribution to the brand and goodwill value. This is particularly true if new owners are able to invest on a financial basis but are not going to work in the business. Their emphasis will be on building brand and goodwill value for the firm (rather than
for themselves).

Not paying for a partner's contribution to the firm's brand value arguably encourages the cultivating of personal brands at the expense of the firm's brand. So, instead of ignoring the significant and difficult issue of quantifying the value of brand and goodwill and allowing for consequent cash payouts, firms should address this issue head on.

In a market in which partners have the ability, and an increasing tendency, to come and go from different firms, applying a cash payout model for brand value might create a win-win situation for a law firm. This could encourage partners to transfer their personal brand value into the corporate brand and to stay longer to cultivate and grow that value.

A calculation for a cash payout from the brand and goodwill value created in law firms could be based on total value for the law firm and then using the percentage share each partner has in the firm. Brand and goodwill value would be quantified using the three approaches (income, market and cost) described above.

Merger strategy

When considering a merger, there will inevitably be a need to seriously consider the changes to branding which will be required. In order for a newly-merged law firm to gain a sustainable competitive advantage, its brand needs to be relevant, distinctive and consistent.

A merger could be damaging to brand value from the effects of a clash of cultures and, consequently a loss of people and clients. Therefore brand due diligence and management needs to be a priority when preparing for a merger. This will ensure the merger strengthens the power of the newly-merged law firm brand against its competitors.

Negotiations to merge often appear to compromise on what might be the safest and most conventional brand strategy by simply joining the names of both firms. However, this does not necessarily take into consideration what best echoes the identity and capabilities of the newly-merged law firm.

The legal industry is known for taking an understated approach when it comes to branding, based on their heritage and beliefs. However, investigation usually quickly reveals that reputation (brand) is in fact taken seriously, although not necessarily articulated as such. Simply merging firms' names runs the risk of overlooking an important and vibrant asset which needs to be nurtured to maintain its value.

Issues can also arise when partners find it difficult to comprehend or identify with the values of the new brand. However, there has been an increase in acknowledgment of the value of brand management and how law firms can fully exploit the opportunities available to rebranding when entering merger negotiations.

Rebranding examples

Many law firms have used mergers to successfully modernise and refresh their branding. Firms that have tackled the complexities of combining both brand values and work ethics include:

• SNR Denton, Salans and Fraser Milner Casgrain, which decided to cut their brand name down to Dentons in order
  to better reflect their brand as modern and efficient;

• Blake Lapthorn and Morgan Cole, which became Blake Morgan to remain recognisable and memorable in its merger to form a top-50 law firm;

• Squire Sanders and Patton Boggs, which merged to become Squire Patton Boggs to create a more unified brand whilst still maintaining its heritage and values; and

• Norton Rose and FullBright & Jaworski, which rebranded as Norton Rose Fulbright. The new firm kept to a more traditional method of joining the names of its founding partners in order to retain its legacy and recognition, as both legacy firms possessed very strong individual brands.

Some law firms have rebranded to better reflect their values and objectives. One example is BonelliErede, formerly Bonelli Erede Pappalardo. The Italian firm combined the surnames of its founding partners to better demonstrate the unity of the business and support its intended transition from domestic market leader to international player.

This type of brand refresh is something that is being considered by firms operating at all levels of the market. In a highly saturated market, a strong brand helps to distinguish a firm from its competition. This helps to create even more financial value for the firm when considering a merger or external investment.

Lucrative returns

Law firms are paying increasing attention to their brands and identifying opportunities for lucrative returns when investing in their business. An increase in demand for brand valuations is currently occurring as a result of rebrands or internal restructurings in preparation for mergers and acquisitions.

Investing in your brand allows for stronger client awareness and market presence. An in-depth financial analysis of your firm's business assets enables it to cultivate its brand and grow its profit margins. In future, quantifying a law firm's brand value will become a much more widespread and useful management tool.

Thayne Forbes is joint managing
director at Intangible Business
(www.intangiblebusiness.com)