Methods for the valuation of a trade mark
What is a trade mark?
A trademark is a unique name, symbol, logo, or image that the owner can use to highlight his or her goods and services against the background of other goods or services. Ownership of a trademark is often confirmed by its registration. The proprietor of a registered trade mark may prevent others from using that mark in order to avoid confusion on the market. But if the trademark is used continuously, its registration can continue for an unlimited period, restoring it accordingly. Trade marks may be created for individual goods or services and may also be used for types of goods or services. A trade name (which often, but not necessarily, corresponds to the name of the company) may have the same market penetration force as the trade mark. Trade names of individual multinational companies are easily recognisable and can be used to promote trade in different goods and services. The term “brand” is sometimes used, which is also used as synonyms for “trademark” and “sales name”. In another context, the brand is perceived as a trademark or sales name that is attributed to social and commercial importance. The brand can actually reflect a set of intangible investments, including trademarks, trade names, relationships with customers, reputation and visibility. Sometimes it may be difficult or even impossible to separate or apply different intangible assets that contribute to brand value.
What are the options for using the trademark?
The creation and development of trade marks often involve significant investment in the market, but their potential is sometimes undervalued. If a merchant – legal person or individual, has developed a trademark, it may consider the following uses:
- Property investment in the capital of a corporation. When establishing a company or increasing capital, a person’s (registered) trademark can be invested as an intangible asset, replacing money and property.
- Trade mark licensing, i.e. transfer of rights to third parties or related companies, in exchange for royalties.
- Reducing the overall tax burden. If a merchant is active on the international market, it is worth considering the placement of a trademark in a jurisdiction with a favorable tax regime.
In all these cases, it may be necessary to determine the value of the brand or trademark. An independent valuer will be required to make a substantive contribution. On the other hand, if a trade mark is sold, the company will have to prove to the State Revenue Service that the trade mark is not sold below market value or there is no tax evasion.
Regulations which determine the value of a trademark
The International Valuation Standards adopted by the International Council for valuation standards (hereinafter referred to as “the SVS”) are used to determine the value of a trademark, the most important of which is the international ISO 10668 standard “Brand valuation — Requirements for brand valuation in monetary terms” ( hereinafter -“ISO 10668”), as well as the Latvian LVS 401 Standard “Property Evaluation” (hereinafter – “LVS 401”), which is based on international valuation standards. Since LVS 401 is designed on the basis of an SMS, both can be considered as equally applicable and use the same methods. SVS defines the market value of a trademark as the expected amount for which the buyer and seller interested in the mark at the date of valuation of the mark exchange assets or liabilities at the market price level, after appropriate marketing activities and where both parties act conscientiously, with caution and not forcibly.
Trademark valuation approaches
Using a market approach, the value is determined by comparing object assets with identical or similar assets for which information on their value is available. According to ISO 10668, the market approach measures the value on the basis of the amount that other buyers have paid for equivalent assets. The market approach gets a potential price for which the brand could be sold. The analysis summarises information about comparable brands and makes appropriate adjustments to compensate for differences between existing and comparable brands. This valuation approach can be used when information is available on similar transactions related to the sale of similar brands (trademarks).
According to the ISO 10668 cost approach, branding is based on the cost of investing in creating, replacing or multiplying it. That is based on the assumption that an investor won’t pay for a brand price that exceeds its replacement or propagating costs. The costs invested in the brand cover all costs spent on building and protecting the brand until the valuation date. The costs of replacing the brand include the costs of creating an equivalent brand, taking into account prices at the valuation date. The costs of propagating include the costs of building a similar brand, adjusting it accordingly for loss of brand awareness. The cost approach requires a comparison between past spending and brand recognition. There cannot be an automatic link between the money spent and the value obtained. The cost method is often based on back data and does not take into account the company’s future earnings potential, so this approach can be used when other valuation approaches cannot be implemented, but reliable data are available to calculate such costs. The cost method is very useful in cases where the mark is at an early stage of its development. The main disadvantage of the cost approach is that much attention is not paid to the economic benefits associated with the use of the brand in the market, that is to say, the potential profit arising from the use of the trademark.
According to the income approach, the value is determined by converting future cash flows to current value. In accordance with international valuation standards, methods that are part of the income approach include: (i) a capitalization method of income that includes all the risks or the total capitalization rate applied to representative income of one period; (ii) the discounted cash flows in which the discount rate is applied to the cash flows of subsequent periods, discounting to their present value, as well as (iii) different valuation models. According to ISO 10668, the income approach evaluates the brand value by reference to the current economic benefits that are expected to be gained during the remaining useful life of the brand. When applying the income approach, it is necessary to analyse the expected post-tax cash flow attributable to the use of assets during its remaining useful use and to convert this post-tax cash flow to current value using an appropriate discount rate.