How to value Trademarks?
One stumbling block for many businesses is in valuing intellectual property. The stumbling block is important to consider because intellectual property takes time and money to register and enforce. Valuation is important to show on a company’s balance sheet. Valuation is important in case there is infringement by a third party and damages need to be calculated.
Damages for trademark infringement are defined in 15 U.S.C. §1117.
Paragraph (a) defines applicable damages of:
1) defendant’s profits,
2) any damages sustained by the plaintiff, and
3) the costs of the action.
The court in exceptional cases may award reasonable attorney fees to the prevailing party.
Paragraph (b) allows for the tripling of actual damages in a counterfeit trademark lawsuit.
The value of the trademark is going to be a plaintiff’s profit in this case. This is called the Trademark Value Model.
The value of trademarks purchased in the course of business transactions is a function of many factors. Typically, the revenue associated with such intellectual property, as well as the relevant discount rate, useful life assumptions, applicable royalty rate, profit margins, risks, and market conditions determine trademark values. Rather than looking to explain stock prices or marginal profitability as a function of intangibles, we seek to determine, or explain, the value of a firm’s acquired trademarks as a function of the sales levels they support, the context in which it was acquired (liquidation or going concern), the industry, and other exogenous factors.
Royalty rates, risk, and margins across industries play a less determinant role than sales, and tend to mutually compensate their effect on the ratio of trademark value to sales.
It’s a crude measurement and some courts have requested more refined models.
The single most important element affecting a trademark’s value or other intangibles with indefinite economic lives is the property’s earning power. The monetary value of a trademark, as typically incorporated in the purchase price allocations we researched, is calculated on the basis of the “Relief from Royalty” method. This method can be viewed as a variation of the valuation of an asset as the net present value of the expected income stream accruing to the asset. It can also be considered as an intangible asset parallel to the Discounted Dividend models used in financial analysis. This method typically uses royalty rates that are based on comparable marketplace transactions, and applies them to a forecast of the revenue stream expected to be associated with the use of the asset in the market. In the case of trademark assets, on the other hand, the time horizon may extend, for all practical purposes, to infinity, as properly maintained trademark registrations do not lapse.