A trademark is an intellectual property consisting of a recognizable sign, design or impression which can distinguish products or services of a specific provider from those of competitors.
Trademarks can be located on the package, label or product itself. They and their associated goodwill, can be important legal rights supporting brands. As such, a trademark valuation is required, similar to brand valuation.
A brand is a constituent element of any business and the registered trademark is considered as a commercial brand supporting the development of your business activity.
When it comes to trademark valuation, there are a few factors that need to be taken into account with the use of valuation methods:
- The geographical sphere of business activities (national, regional and international)
- The marketing budget allocation for commercial development
- The fame of your company or brand
- The current and future modus operandi of your brand
Trademark valuation methods are many and here are 4 of the most common best practices:
1. Market Multiples Approach
This mainly uses the study of companies in a similar industry to comparable business models with a similar size. Their financial and accounting data is collected. Trademark evaluation is based on identifying the most relevant company business models and comparing their business performance with your company, thereby calculating the relevant multiples and ratios.
By using this method, the data will help evaluators to establish the most relevant multiple linked to your trademark valuation by taking references into account such as revenue, gross margin, current income before taxes and net income etc. Additionally, analysis of the operating territories and brand’s positioning are also done to moderate these multiples.
2. Market Approach
This is based on market observation and actual trademark valuations of comparable brands through research or public accounting data. Hence specific market-related data is required. It is generally based on ratios enabling by estimating the value of the target brand according to brands or companies in a similar industry. A risk premium is then derived.
The data and ratios collected, are then compared and transposed to estimate the value of a brand, taking into account its specific characteristics – market, reputation, territory and activity. The size of competing companies is also taken into account.
3. Income Approach
This refers to the present value of future incremental cash flows attributable to the specific trademark valuation and it needs to be determined by the evaluator. To determine this value, four factors are taken into consideration:
- Strategic use of the trademark – product sales, licensing, enforcement, and/or for defensive purposes
- Amount of the cash flows
- Timing of the cash flows – when they start and when they end (remaining useful life)
- Risks of the cash flows
The nature of the cash flows associated with a trademark typically includes the use of a trademark in the sale of one or more products.
4. Relief From Royalties Approach
The amount of royalties that a company would have to pay is being assessed based on a hypothetical licensing agreement just in case it did not own its brand. Other factors like industry, territory, reputation of the licensed brand and planned developments are also taken into account.
This method is based on actual commercial contracts or contracts in progress. Similar licenses in identical industries are also being analyzed for a more accurate conclusion so that the terms regarding the theoretical royalties that could be granted under a trademark license signed with comparable conditions, can be determined.
A theoretical average royalty rate is established over a certain period of time and the discounted royalty flow method is then applied. The value of the brand is thus determined on the basis of the sum of future royalty flows net of discounted taxes, increased by the discounted residual trademark value.
In summary, the trademark valuation methods are diverse and many factors need to be taken into account when it comes to accurate valuation of a trademark. There is no “one size fits all” approach. Rather, it is the use of two to three methods of investigation and analysis to derive an accurate and conclusive value.
