Thoughts regarding the economic benefit of brand names for nonprofit entities.

March 05, 2019

The Salvation Army, UnitedWay, UNICEF, and YMCA are some of the most well-known and longstanding nonprofit organizations in the U.S. They provide much value through various causes and services. While nonprofits like these and others might be household names, how much are their brands worth?

Brand valuations consider a number of factors, with emphasis on the profit margins derived by the brand. Because a nonprofit entity does not seek to return profits to its stakeholders by nature, does the brand name of a nonprofit entity have any value? What good is a brand name if it doesn’t generate profits?

These questions may arise if a nonprofit entity is acquired and its underlying tangible and intangible assets require a fair value analysis.[1] And, as with many questions related to intangible asset valuation, the answer to the above questions is: “It depends.”

When considering the fair value of a brand name in a nonprofit entity, one should keep in mind that while nonprofit entities do not seek to maximize shareholder value, they do seek to maximize income to support their mission – the underlying cause that the entity is devoted to supporting. To gauge the traditional concept of profit for a nonprofit entity, instead of understanding “operating income” as one would at a for-profit entity, one can look to the “change in net assets” for a nonprofit entity.

If the nonprofit’s change in net assets is positive each year, then the nonprofit entity clearly had revenues that exceeded expenses. If the change in net assets is negative, it is not necessarily a sign of an unhealthy nonprofit entity or a weak brand name; it could be an intentional expenditure on a major program related to the nonprofit’s mission. On the other hand, if the nonprofit consistently and unintentionally had expenses which exceeded revenues, it could be the sign of an unhealthy nonprofit entity and potentially a weak brand. An analysis and understanding of the story behind the nonprofit’s historical and forecasted financial statements is critical to understanding the strength of the entity and its brand.

Whether the nonprofit is a charity, religious organization, or service provider, the principles of valuing for-profit entities’ assets still apply, such as investing cash flows into the business, building brand awareness, and striving for continual growth.

As a result, if the brand in question is well-known in its field, and would be kept in place by a theoretical market participant, it stands to reason that the brand should be valued. Alternatively, if the brand is relatively weaker among other participants in the nonprofit’s sector, and if it could be argued that most participants would discontinue usage of the brand, the brand may not have value ascribed to it. This logic is consistent with the approach taken in the for-profit realm.

When determining the fair value of a brand name (regardless of its nonprofit mission or traditional for-profit objectives), valuation practitioners typically employ the Relief from Royalty Method. Here, they consider a variety of factors to estimate a theoretical royalty rate for the subject brand. The fact that the owner is relieved from paying royalties for the brand represents its value: the present value of all future avoided royalty payments.

In estimating the theoretical royalty rate in the nonprofit setting, practitioners would consider factors that lead to estimating the value of for-profit brand names, including licensing agreements for the subject brand, licensing agreements for comparable brands, profit margins at for-profit entities, and reasons for positive or negative historical changes in net assets for the subject brand. When researching these factors, it is uncommon to find perfect data such as a recent licensing agreement of the subject brand, so judgments must be made with comparable royalty data. A portion of the nonprofit’s change in net asset margin and for-profits’ operating margins can also be considered as a ceiling for a theoretical royalty rate.

In general, many of the nuances of valuing a brand name in a nonprofit setting are very similar to the valuation of a brand name in a for-profit setting, such as understanding the brand’s position in the marketplace, analyzing comparability of market royalty rates, understanding historical financial trends, and using supportable rationale to estimate a royalty rate for the subject brand.

  1. Pursuant to ASC 958-805, Not-for-Profit Entities – Business Combinations.

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