Guide to Valuation of Trademarks
The worth of a trademark can be used to determine the overall value of a company in the event of a merger or purchase.
From the standpoint of valuation, damages, and transfer price, trademarks present a challenging yet interesting task. They are a significant commercial instrument that can become extremely useful. Forbes magazine has named the “Google” trademark the most valuable in the world, valued at $44 billion, exceeding the GDP of numerous small countries. In various situations, including financial accounting and tax-related transfer pricing, this article covers the significant variables of the value, damages, and transfer price of trademark-related intangible property.
Trademark valuation in business
Any symbol, word, or combination of symbols, words, or combinations of symbols, words, or combinations of symbols, words, or combinations of words, used to represent or identify a product. A service mark is similar to a trademark, but it marks a service. Trademarks are significant because they serve as a distinctive identifier. When a consumer sees a trademark, they immediately associate it with a company. It could be the logo’s name, design, or color scheme.
What is a trademark?
A trademark is a business symbol that adds to the company’s image-building efforts. It is a symbol of quality and distinction that identifies the producer. A trademark, like a logo, might be a mix of color, typestyle, and shape, or only shape and color, as in McDonald’s golden arches. A logo can be used as a trademark, and it is frequently done so. On the other hand, a trademark can be a separate symbol from the company’s logo. The term “trademark” also has a legal meaning. A trademark, in the legal sense, a trademark is a way of protecting your company’s emblems against unlawful use.
Why is a trademark important for a business?
Startups can protect their brand by trademarking it. By trademarking a company name, one distinguishes one’s services and products from competitors’, and one’s intellectual property is protected. It prohibits competitors from copying or stealing their brand. When a company has a trademark, it’s critical that it maintains a positive image. People are more likely to work with and for a company that has a strong reputation. Failure to register a trademark exposes a company to lawsuits from competitors who have registered a trademark under the same name, sign, slogan, or design. If this happens, a company will be obliged to change everything it has created, including the campaign, website content, and, to a large extent, its brand identity.
Types of trademark
There are various types of trademarks that are used for the registration of various purposes. The explanation of these trademarks is given below:
- Generic Mark – Generic marks represent the ordinary descriptions of a product or its seller. “Shoes”, “watch”, or “meal” are examples of frequent words. However, because these phrases are common knowledge, a restaurant, for example, cannot establish a trademark for the term “restaurant”. And rightly so, as doing so would result in an unjust monopoly over the whole food and beverage business. Every other business in the area is at risk of going out of business. As a result, in order to qualify for a generic mark, a corporation must add another modifier that is unique to its products.
- Suggestive Mark – A commensurate level of creativity is required to qualify for a more specialized, and hence more protective, trademark. Suggestion Marks, for example, register terms that infer product features without necessarily connecting to them in a literal manner. A fundamental consideration in identifying a mark as suggestive is the consumer’s imagination. Netflix is a fantastic example because it hints at its service line without explicitly declaring that it is an internet streaming platform.
- Descriptive Mark – A Descriptive Mark pertains directly to the products, but a generic mark may represent a product or its source. These terms, on the other hand, are not registrable because they are considered ubiquitous. On the other hand, adding a signifier to designate a significant quality of the product could make it eligible for trademark protection.
- Arbitrary Mark – Arbitrary Mark takes words or phrases from the common lexicon. On the other hand, these labels should have nothing to do with the goods they represent. The disadvantage is that the cost of advertising tactics has gone up. Efforts should be concentrated on instilling in the audience a new semantic association. However, this should not discourage you because success would result in substantial profits. Take Apple, for example, a fruit-themed brand. It sells electrical products that are well-known as high-end gadgets and, ironically, as inedible commodities.
- Fanciful Mark – This is the most straightforward type of trademark to register that merely takes the creation of a new word that has no current meaning for the general audience. Fanciful marks, while easier to file, necessitate intelligent consideration as well. The organization should pay special attention to how the target audience will react to the brand. It’s best to do some thorough study to see if it’s easy to remember, spell, or pronounce. Companies should evaluate their fancy mark’s cultural implications because brands would most likely wish their trade to get favorable attributions.
- Service Mark – A service mark separates an organization’s class of services from that of other similar suppliers, despite the fact that the phrases are commonly used interchangeably. American Airlines, Hilton Hotels, and Meydan are just a few examples. Service marks take longer to process than products because they are more difficult to measure, and they usually have more stringent evidential criteria. It is not necessarily necessary to register a service mark in order for it to have legal force.
- Trade Dress – Particular aesthetic characteristics of packaging, interior, or exterior design are covered by trade clothes. While the protection is intimately tied to the product, it also concerns the way the product appears. It’s important to remember that trade dress protection only protects the appearance of a product, not the functionality. If you want to register a one-of-a-kind form with a specific purpose, you should speak with a patent attorney.
Difference between owning a trademark and registering it
You become a trademark owner when you start utilizing your trademark in conjunction with your goods or services. By utilizing your trademark, you establish rights in it, but those rights are restricted and only apply to the geographic area where you provide your goods or services. If you want better, nationwide protection, you’ll need to apply to register your trademark with us. It is not necessary to register your brand.
A trademark that has been registered, on the other hand, has more rights and protections than a trademark that has not been registered. For example, you might use a logo as a trademark for the handcrafted jewelry you sell at a local farmer’s market. You may want to pursue extra trademark protection and file an application as your firm grows and operates online.
Why is registering a trademark important?
A trademark registration establishes ownership of a brand, name, or logo. It safeguards your brand from unauthorized third-party use. The registered trademark establishes that the product is entirely yours and that you have sole authority to use, sell, and change the brand or items in any way you see fit. A trademark protects your brand and gives you the tools you need to keep others from riding on your coattails. The shape of items, their packaging, and a combination of colors are all examples of trademarks that can differentiate one person’s goods or services from those of another.
Valuation of trademark
Once a trademark is registered, it becomes a company’s intangible asset. It can then be sold, licensed, pledged, and even royalty can be earned on it. The worth of a trademark can be used to determine the overall value of a company in the event of a merger or purchase. Analyzing a brand’s value through its Intellectual Property is a wonderful technique for filtering and deciding on numerous investment opportunities and developing fresh and distinctive marketing strategies that will help further increase the brand’s image. Companies must comprehend the worth of this asset at this point.
Understand trademark valuation
A trademark is a separate intangible asset from goodwill on a reporting company’s balance sheet. It is the result of legal rights (remember, a trademark is essentially a bundle of rights). It can be sold, transferred, and licensed independently of the acquiring company’s other assets. A purchase price allocation (PPA), in which a percentage of the price paid by the acquirer for all of the acquired assets is assigned to the trademark using an approved valuation methodology, is used to recognize an acquired trademark.
Why is trademark valuation important?
In a business transaction involving the sale of an asset, such as a trademark, it is critical to arrive at an appropriate price at which the seller is willing to sell it, and the buyer is willing to acquire it within a suitable time frame. Sellers, on the other hand, have a tough time deciding on a price for the asset and finding buyers willing to pay that amount.
The valuation of an asset, such as a trademark, can assist a buyer in determining its approximate price using various appraisal methodologies. Entrepreneurs and trademark owners frequently wonder how much their trademark is worth. As a result, trademark valuation is extremely relevant, especially given the growing number of situations where the value of intangible assets such as trademarks is being questioned.
How to do trademark valuation?
The valuation of trademarks is an important practice, especially given the growing number of cases in which intangible assets such as intellectual property are valued higher than tangible assets. To create pricing and contract terms for transactions such as a purchase or sale, a license, or a contribution to a partnership such as a joint venture or co-branding campaign. To assist in creating and implementing particular corporate or individual tax strategies or ensuring compliance with tax legislation relating to intercompany transactions (i.e., transfer pricing), corporate reorganizations, and trust and estate issues.
Trademark valuation methods
Valuation analysts use three widely accepted valuation methodologies to determine the worth of intangible property, such as trademarks. The following are some of the most often used ways to value intangible assets:
- Cost approach – The cost technique is less frequent than the other ways of estimating trademark value. Because a trademark gives the owner exclusive rights, it provides economic benefits that aren’t always represented at the expense of creating and developing the property. As a result, the cost technique is not always appropriate for a trademark valuation analysis.
- Income approach – In trademark valuation, income approach strategies are frequently employed. In practice, numerous income methodologies and valuation methods are applied. Calculate the present value of future income streams estimated to be produced by the use of the trademark during its remaining useful life to determine the worth of a trademark (RUL). In general, the procedures for determining those income sources vary.
- Market approach – Trademark sales are less prevalent than trademark licensing since trademarks are connected with certain items and enterprises. As a result, there is a good amount of publicly available information about trademark licensing, which is frequently gleaned from financial reports filed with the Securities and Exchange Commission. This data enables the researcher to create trademark comparison units, most notably a royalty rate.
- Relief from royalty method – The commonly used model implies that if a company possesses a trademark, it is exempt from paying a royalty, allowing for the estimation of a hypothetical royalty payment. This analysis is also classified as a market approach.
- Intercompany transfer price method – The Internal Revenue Code and related rules govern transfer pricing procedures, which are a specialist area of valuation. The Section 482 regulations compel the transfer price analyst to use the “best method” rule to allocate taxable revenue between related parties in certain transactions.
How is remaining useful life (RUL) used in trademark valuation?
The evaluation of remaining usable life (RUL) is a crucial part of the intangible asset appraisal process. The utility of RUL analysis in the application of the income method to valuation is clear. RUL analysis is required to identify the time period during which revenue (however measured) is capitalized, regardless of whether a yield-capitalization approach or a direct-capitalization method is used. The cost approach and the sales-comparison approach to value both benefit from RUL research. The estimation of RUL is one way of assessing any external obsolescence in the cost approach. The calculation of RUL is one component in selecting and amending intangible asset guideline sale/license transactions in the sales-comparison technique.
Trademark valuation example
For appraisal, all market data related to the sale, license, or franchising will be used. The following are the two most significant things to consider while determining the value: The existence and accessibility of important market data, as well as the similarity of the transaction that serves as the valuation’s foundation.
For instance, if two well-known technological brands or corporations recently sold their businesses for $8 million and $10 million, another company in the same sector can use this information as a benchmark for valuing its trademark. The volume of data linked to trademark transactions and the price of any comparable assets that are publicly available make this strategy difficult to implement.
Get your valuation services with Eqvista!
The value of a trademark is determined by the goodwill connected with it. Goodwill is an intangible asset that contributes to a company’s trademark value. It’s tough to put a monetary value on goodwill because many variables are to consider. It will be a major concern if trademark value is at stake. Registering a trademark is a significant part of the business. Our team of valuation experts helps you to make the process of trademark valuation much easier. Fill up the sign-up form and get in touch with us.