Leveraging Trademark and its Valuation

Most SME business owners are busy managing and expanding their businesses. The focus generally is on sales/revenue growth, increasing profits, fixed and other assets such as inventory, debtors, creditors, etc. Many important assets which are intangible in nature are not front of mind including, the people/staff, goodwill, etc. One such asset which can grow in value over time, perhaps significantly, and can help a business scale and expand faster, is the trademark.

Oftentimes, trademarks and tradenames are used interchangeably but these intangible assets are not exactly the same. From a practical point of view, for a single tradename company that uses the tradename as the trademark, these are similar and as such can be valued together. This is not the case with multiple trademark companies where each trademark may relate to a different product or service and the tradename (or the overall Branding) may cover the entire business.

Definition of Trademark

A trademark means any sign capable of being represented graphically which is capable of distinguishing goods or services of one undertaking from those of other undertakings.

• Sign – any letter, word, name, signature, numeral, device, brand, heading, label, ticket, shape of goods or their packaging, colour, sound, scent, hologram, positioning, sequence of motion or any combination thereof.

• Collective Mark – A collective mark shall be a sign distinguishing the goods or services of members of the association which is the proprietor of the collective mark from those of other undertakings.

• Certification Mark – A certification mark shall be a sign indicating that the goods or services in connection with which it shall be used are certified by the proprietor of the mark in respect of origin, material, mode of manufacture of goods or performance of services, quality, accuracy or other characteristics.

Functions of Trademark:

• Origin: A trademark helps to identify the source and those linked for the products and services traded in the market.

• Choice: A trademark assists consumers in selecting goods and services with ease.

• Quality: Consumers associate a certain trademark with its known quality.

• Marketing: Trademarks play a significant role in promoting. It’s common for consumers to make purchases based on the continuing impact of advertising.

• Economic: A recognised trademark is a valuable asset. Trademarks may be licensed or franchised.

An SME trademark owner can allow another party to use the trademark while retaining the ownership of it. This can be lucrative and can be done by entering into a licensing agreement with another party. A trademark license is between a trademark owner (or licensor) and another party (or licensee) where the licensor allows the licensee to use the trademark.

Trademark licensing covers franchising, distribution agreements, and merchandising. It also plays a crucial role in how services and goods are marketed, distributed, and sold in local and international markets, so the licensor can have control on these matters. Most of these licenses have provisions which control the duration or term of the license agreement. They also include matters such as the royalty rate for the use of the trademark (which can be based on revenue, gross or other levels of profit), the territory/jurisdiction(s) the license covers and if the licensee has exclusive rights to the trademark.

Most license agreements will also include provisions about quality control, i.e., the quality of services or goods that are offered or produced under the licensed trademark so the licensor can maintain the required standards.

Case Study:

ABC runs a successful restaurant in Singapore. It has been around for 25 years with a large customer base. Through word of mouth, its popularity has increased, and it has been covered in various magazines and blogs. The restaurant is now being managed by the 3 children of the founders. The second generation believes that the growth as a standalone restaurant is limited and they should open more outlets to leverage the trademark and the well-known name (Branding) of the restaurant. They are contemplating a few options including, opening new outlets on their own, franchising and delivery through own riders and other channels. All these options are possible only due to the trademark and the branding of the ABC restaurant.

Valuation of trademarks is essentially the determination of how much a company’s distinctive trademark is worth. Trademarks are used to identify/distinguish a company’s unique products and services from its competitors. Trademarks can present challenges from a valuation, damages (infringement or other loss), and transfer price (tax) perspective.

Trademarks are created through use and need not necessarily be registered. Registration is generally recommended as if an infringement occurs, it can make enforcing the right easier.

Common methods to determine a trademark’s value include the:

• Income Approach – using past and forecast profits

• Market Approach – using comparable transactions of similar assets

• Cost Approach – using the cost of recreating or reproducing a trademark

• Relief from Royalty (RFR) – estimating royalty savings by virtue of owning the trademark. RFR is a subset of the Income Approach. RFR is the most common approach for the valuation of trademarks. It is based on the concept that a company does not have to pay to license a trademark it owns.

Steps involved in RFR valuation include the following:

• Estimation of future royalty payments which would have to be paid to the owner of the trademark for its use on an arm’s length basis

• Calculation of the savings achieved from owning the trademark or relief from royalties that would otherwise be paid to the owner

• The net after tax royalty fee calculated each year (for the life of the trademark) and discounted to present value using a discount rate

Valuation of trademarks is not a straightforward exercise. It involves research, information gathering, support for assumptions, cross-checks. It is subjective in nature and involves the valuer’s judgement on certain assumptions. Time needs to be spent on understanding the various aspects of the trademark and the relevant business, otherwise there is always the risk of over-valuing or under-valuing something if it is not properly understood.

In conclusion, SME owners should pay attention to the trademark(s) they may have created in the normal course of business. Registration, marketing and advertising and other trademark and brand building exercises can generate significant value if the trademark is leveraged properly. Valuation of the trademark can go a long way for business owners to understand how to use it for business growth and expansion.

By Adie Gupta

This article has been authored by Adie Gupta, the Co-Founder and Managing Director of Spring Galaxy. Adie has been providing valuation and strategic advisory services to the corporate sector and government agencies across the Asia Pacific region for more than 20 years. He is a regular trainer for accounting bodies, business schools, angel networks as well as a speaker at various conferences and other forums on valuation and IP.