Intellectual Property (IP) Valuation
We all know that Intellectual Property (IP) valuation plays a key role in determining the solvency, merger or acquisition of a company. IP valuation is certainly considered as one of the most critical areas in finance. As an economist, I was always intrigued by it.
There are numerous reasons or motivations for conducting an intellectual property valuation or economic appraisal analysis. A valuation is prepared, for example, for transactions, pricing and strategic purposes, financing securitization and collateralization, tax planning and compliance, and litigation support.
I recently received an inquiry regarding a trademark valuation that inspired me to write this article for our newsletter. It was from a family business that decided after many years in business to change industries.
Brand Finance, an independent business valuation consultancy (www.brandfinance.com) estimates that 72% of corporations’ value in the United States of America is explained by the value of its intangible assets.
In order to complete the valuation of a given company, it is important to determine:
When is a good time to valuate a trademark?
What is a good reason to do it?
What is the meaning of economic value?
Which one is the right method to valuate?
Most of us understand that a trademark is a sign capable of distinguishing the source of specific goods or services from others. At the national and/or regional level, trademark protection can be obtained through registration obtaining the exclusive use and property in the economic market.
A trademark can be valuated at any given time and for a variety of reasons, strategies, financial reports, acquisitions, litigations and mergers, etc.
The economic value of a trademark is the extra money that a consumer pays for the products under one particular trademark comparing to another similar one because it gives consumers more peace of mind and confidence. Valuating a trademark has objective and subjective components, the evaluation occurs in a market and within a context. Concerning the correct method or approach, there are many. All of them require an investment and market knowledge. Depending on the circumstances, we can use one and/or the other to obtain an accurate valuation.
The valuation analysts use numerous approaches in order to reach a reasonable indication of a defined value for the subject intangible assets on a certain date which is referred to as the valuation date. The methods or approaches are:
INCOME APPROACH BRAND VALUATION: It considers the valuation of future net earnings that can be attributed directly to the brand to determine the value of the brand in its current use.
COST BASED BRAND VALUATION: It is based on the accumulation of the costs that have been incurred to build the brand since inception.
MARKET-BASED BRAND VALUATION: This method uses one or more valuation methods by comparing similar brands which have been sold.
ROYALTIES BASED VALUATION: Contemplates an estimation of the royalties’ value that a person has to pay for using a trademark if he/ she is not the owner and wants to use it.
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