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. 6 min read
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.
Risks that are related to a trademark can be different from the risk a business experiences as a whole. Figuring out extra benefits or risks makes sure a measurement that's more accurate of the fair value is taken for the trademark. For telecommunications companies, the issue is about how much remaining life is useful of the acquired trademarks.
Particular co-branding and rebranding that are related to the acquisition can't be included. The acquirer's intention can't be taken into account, with the exception of a particular circumstance that proves participants in the market would have acted similarly. This must be supported by strict documentation.
The term that's used to describe a transfer of an owner's title, interest, and rights in a service mark or trademark to a different party is known as a trademark assignment. With a trademark assignment, the assignor, or transferring party, transfers their property rights with the trademark to the assignee or receiving party. Trademark rights can be partial, where only one part of the rights are transferred to an entity or person, or outright, where someone acquires total rights.
Partial assignments vary on the jurisdiction and can be for one part of the territory that the registration covers. It may also be for only part of the services or goods that the registration covers. The laws regarding trademark assignments vary for each jurisdiction, but all include what form the assignment needs to take, if it needs to be notarized, if a mark's goodwill needs to be transferred, if any kind of consideration needs to be expressed, and if the assignment needs to be recorded.
What Are the Laws Governing Trademark Assignments?
The laws regarding trademark assignments vary for each jurisdiction, but all include what form the assignment needs to take, if it needs to be notarized, if a mark's goodwill needs to be transferred, if any kind of consideration needs to be expressed, and if the assignment needs to be recorded. The regulations and laws of every jurisdiction where a trademark currently exists must be reviewed before the trademark assignment can be undertaken. Not following these rules may lead to unwanted tax consequences or cause the transfer to be invalid. Trademark applications may be assigned in some jurisdictions.
Can I Retain Ownership of a Trademark if I Allow Others to Use It?
Another party can be allowed to use your trademark while you still have ownership of the mark. This can be done by going into a license agreement with that entity or person. A trademark license is between a trademark owner (or licensor) and another party (or licensee) where the trademark owner allows the licensee to use their trademark. This means the license allows something to happen that would otherwise be prohibited without the trademark owner's consent.
Trademark licensing covers franchising, distribution agreements, and merchandising. It also plays a crucial role in how services and goods are marketed, distributed, and sold internationally and domestically. The majority of licenses have provisions in them which control the length or term of the license agreement. They also include what the royalty rate will be in order to use the trademark, the territory the license covers, if the licenses need to be recorded, if the licensee has exclusive rights to the trademark, and what jurisdictions are covered by the license.
Most license agreements will also include provisions giving the licensor control of the quality of services or goods that are offered or produced under the licensed trademark. These are known as quality control provisions. In Canada and the United States, it's crucial that the license agreement include quality control provisions. Without these provisions, the trademark might be vulnerable to being attacked or be considered abandoned according to the licensor.
The rationale for this is consumers often rely on the reputation of a trademark based on terms of quality when buying services or goods. The licensor is then considered to be in charge of exercise control for the quality of services and/or goods that the licensee offers. It's a smart business practice to exercise quality control for many reasons. For example, this may help keep a high level of goodwill for a brand and can even decrease potential liability. Trademark applications may be licensed in certain jurisdictions.
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, Menlo Ventures, and Airbnb.