Valuation of Trademarks: Everything You Need to Know
Valuation of trademarks is a process used to determine how much a company's distinguishing trademark is worth. 3 min read
Valuation of Trademarks
Valuation of trademarks is a process used to determine how much a company's distinguishing trademark is worth. Trademarks are used to distinguish a company's unique products and services from those of others in the marketplace. If a company's trademark carries associated goodwill, the process of trademark valuation will be similar to that of a brand valuation.
An Example of Trademark Valuation
When Diamond Foods purchased potato chip maker Kettle Foods in 2010, 40 percent of the purchase price, about $235 million, was considered the cost of the brand itself. Trade names and other trademarks constitute substantial value in many business transactions. According to Forbes, the five most valuable worldwide brands are:
- Apple, worth more than $104 billion
- Microsoft, worth more than $56 billion
- Coca-Cola, worth more than $54 billion
- IBM, worth more than $50 billion
- Google, worth more than $47 billion
How Do I Know What My Trademark Is Worth?
Forecasting a brand's value is an important part of convincing investors and leadership to invest in brand development. Most trademark valuation is based directly on its projected future earning power, based on income history. For a new brand with no history, evaluators must apply experience and common sense to predict the brand's earning potential. They can also use feedback from industry experts, market surveys, and other studies.
Though goodwill is intangible, it forms a substantial portion of the brand's value. Many variables must be considered to estimate the value of goodwill. These include future opportunities for the trademark value to be increased and competitive risks that may threaten the value of the trademark.
Common methods used to determine a trademark's value include the following:
- Using past and expected future profits (the income approach)
- Using comparative transaction with similar assets (the market approach)
- Using the cost of creating a trademark (the cost approach)
- Estimating royalty savings created by trademark ownership (the relief from royalty approach).
The latter idea comes from the concept that a company does not have to rent an asset it owns. This approach measures the net profitability of this intangible asset, which would otherwise be subject to royalty payments and a trademark licensing agreement. When using this approach to value a trademark, you'll need to assume the discount and royalty rates and the revenue base. Steps of the royalty approach to valuation include the following:
- Determine how the trademark will be used in the future, whether it will remain critical and will be phased out over time, and how management's expectations in this regard may differ from those in the market.
- Determine the projected profit to be generated by the trademark, including trademarks or product names for multiple services lines and products. This includes the length of time for which they will generate revenue, which may be for just a few years or for the foreseeable future.
- Figure out the royalty rate for this profit stream, based on what it would cost for another company to license a similar trademark. Review market data for royalty rates in legal agreements, SEC filings, and the Royalty Source Intellectual Property Database.
- Estimate the discount rate, which indicates how much your company saves by avoiding royalty payments on the trademark it owns. Consider the risks associated with a trademark, whether branding and rebranding will occur, the strength of the brand, your company's current position in the marketplace, and historical financial performance.
With the income approach, estimate future profits to be derived from the trademark and adjust them to present value. With the market approach, you'll use indicators of value that include a transaction price, bid, or offer for a similar product in the current market.
The cost-based brand approach accounts for individual aspects of the brand to determine overall value. For example, the value of the brand would be based on the historical costs of advertising, promotion, campaign creation, and licensing and registration. This is an ideal method if you've recently created your brand. When doing so, make sure to update actual expenditures to current costs. Keep in mind that the figure you arrive at doesn't necessarily indicate how much the brand would be worth on the current market. You may want to consult a professional who specializes in the valuation of trademarks.
If you need help with valuation of trademarks, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.