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In this article, we address the economic valuation of the trademark and discuss the moments when its valuation is necessary, setting out the main methods to implement it.
Yes, an unregistered trademark (common law trademark, according to the USTPO definition) may also be subject to evaluation. However, one of the most significant factors in determining the value of a trademark is its registration. All economic conditions being equal, a registered trademark is more valuable than a de facto (unregistered) trademark. Registration provides certainty about industrial property rights and eases the power to dispose of them. It is therefore always a good idea to ensure that you have registered your trademark(s).
The trademark is one of the distinctive signs of a company, but it does not only have a distinguishing function. It also possesses an intrinsic advertising function. The additional value of a trademark lies in the functions it performs (brand equity).
The trademark is one of the most important intangibles in the estimation of a company’s economic capital, representing – for some companies – the main corporate asset. As a matter of fact, it has been estimated that intangible assets can cover up to 80% of a company’s value (this insight, however, only occurred in the last 30 years).
Several moments may arise during the life of a company at which it is mandatory (or at least useful) to evaluate a trademark. These moments coincide with the decision to sell, grant or transfer the trademark itself.
Economic evaluation will be particularly appropriate when:
In most cases, the evaluation of the trademark takes place almost by chance, as part of the overall assessment of the value of a company ( which the trademark is clearly part of), as happens in the case of extraordinary operations (merger, demerger, etc.).
Similarly, in the event of bankruptcy, the trademark is subject to valuation prior to its forced sale to meet creditors’ demands.
A universally recognised and correct valuation method does not exist. The choice of the valuation method to be adopted must be weighed up – case by case – after an in-depth analysis of the company’s actual situation and the reference market. By economic evaluation we mean the process of determining the value of the trademark in monetary terms (Euros, Dollars or any other currency).
The main methods relied upon for the evaluation of a trademark may be classified into three distinct categories:
This category of methods – also referred to as economic-income methods – aims to quantify the contribution of the trademark to the profitability of the company.
The trademark contribution can be calculated as the difference between the income of a company generated by trademarked products/services and the income obtained from the same or similar trademark-free products/services (known as differential income). In other words, the higher income earned from the presence of the trademark is calculated.
The other most commonly used economic-income method is that of royalty rates. This approach calculates the trademark’s value by reference to the royalties that a third party would be willing to pay on the market to obtain authorisation (grant or licence) to use the trademark. In order to determine the royalty rate, one must primarily refer to the profits that the third party will be able to generate by exploiting the trademark. Royalty rates typically range from 1% to 10%. Once the royalty rates are set, they are applied to the estimated turnover of the trademarked product, providing the economic evaluation of the trademark.
In the second category of methods that we are going to analyse, the value of the trademark is quantified economically through the assessment of the amount of monetary resources necessary to replicate an identical trademark, or one that provides the same competitive advantages. The purpose of applying this method is to ascertain the cost of creating the trademark under evaluation.
All costs, charges and investments sustained during the lifecycle of the trademark must be taken into account. These include costs for design, registration, advertising, marketing activities and all those investments made to launch, consolidate and renew the trademark.
To properly assess the investment contribution, they should be measured by their utility, not including redundant investments, and be updated in financial terms, in order to make them time-equivalent (namely, discounting).
This last category of methods involves the indirect recognition of the value of the trademark, as derived from prices agreed upon in recent transactions with similar trademarks.
This approach aims to gather information on the economic evaluation of the trademark as perceived by the market. It is crucial to make a comparison with other transactions of similar characteristics (e.g. the strength of the trademark and the relevant product market).
The main difficulty in implementing this method lies in the lack of a sufficient number of comparable cases and in the influence of the subjective conditions of the parties that individually define the specific transaction.
Trademark evaluation is predominantly an economic evaluation. As a general rule, however, one turns to law firms or accountants who usually collaborate with experts in economic and commercial matters.
As previously mentioned, a company owns one or more trademarks, and some of them are unregistered. The Canella Camaiora Law Firm deals also with the analysis and reconstruction of the intangible assets portfolio of a company. The identification and legal assessment of the validity and legal standing of trademarks is actually prodromal to their economic valuation.
Trademark evaluation is one of our most popular services. The “Trademark Evaluation” service is one of the special services in the “Intellectual Property” area of activity of the Canella Camaiora Law Firm (the service description page is available here).
We provide high quality advice in cooperation with economic experts in intellectual property. For more information on our intellectual property services, please contact us.
(First published on 7 May 2019, updated on 19 March 2022)