Trade Mark Valuation

A Trade Mark like any other Intellectual Property is an intangible asset that adds value to an organization. Entrepreneurs or owners of trademarks frequently want to know the worth of their assets including their trademarks/brands. As a result, trademark valuation is quite relevant when there is a growing number of instances in which intangible assets like trademarks are valued higher than tangible ones. Trademark owners also earn from selling, licensing, or leasing their trademarks. 

To determine the overall value of a company during the time of merger or purchase, knowing the worth of its trademark (an intangible asset) is highly significant. 

Trademark Valuation is Useful for: 

• Brand Management

• Licensing

• Acquisition

• Brand extension

• Sale

• Joint Venture

• Investment by investor

• Financing

• Auditing etc.

METHOD/APPROACH: There are some common methods or approaches used to determine the value of the registered Trade Mark, they are-

• INCOME-BASED VALUATION- under this approach, the valuation of the mark is calculated by deducting the future economic income that the registered mark is expected to generate from the present value of the registered Trademark. However, Economic income can be calculated by considering the following:

• Gross revenue

• Net revenue

• Gross profit

• Net operation profit

• Income before tax

• Income after tax

• Net cash flow

• Cost saving

For example, the trademark "CoolDrink" generates ₹10 lakhs in annual sales, with a net profit of ₹4 lakhs. Assuming that without the trademark, similar products generate only ₹2 lakhs in net profit, the trademark contributes an excess profit of ₹2 lakhs per year. If we estimate future profits over 10 years and apply a discount rate of 10%, the present value of these excess earnings determines the trademark's valuation.  (This example is created using Excess Earnings Method)

MARKET METHOD- Under this method a comparative study is done with the actual price paid by the purchaser for a similar product of 2 or more different registered marks or brands. In this method, a detailed study of market data related to sales or licensing is carried out.

Steps to be followed for valuation of Trade Mark under this method:

• Data Research about the sale or licensing of the Trade Mark along with similar products of different Trademark
• Verification and confirmation of such Data Research
• Selection of unit for comparative study as well as developing a comparative analysis for each unit
• Adjustments of data where necessary
• Reconcilement of various data attained from the previous analysis and producing a single value from different comparative analysis

Factors to be considered while calculating:

• Timing or duration

• Risk or uncertainty

• Company structure

• Market size and character

• Cross-licensing

• Geographical coverage or territorial jurisdiction

• Management matters etc.

For example, the trademark "Sparkly" for cleaning products is valued by comparing it to "Shiny," a similar trademark that was sold for ₹2 crores. Adjustments for market differences are made because "Sparkly" operates only locally, whereas "Shiny" has a national presence.

Let’s Suppose that national brands have 50% more value than local brands. Now, if we consider the value of Shiny to be ₹2 crores then the value of Sparkly, which is a local brand, would be ₹1 crore.

COST METHOD- Under this approach, various costs are taken into consideration in developing or creating a trademark internally or externally and the duration taken to replace the existing trade mark, has equal strength to that of the former.

FACTORS TO BE CONSIDERED

• Labour cost

• Material cost

• Research and development

• Trial and testing

• IP registration and other related costs.

For example: The trademark "EcoWear" is valued by adding up the costs: ₹5 lakhs for research, ₹2 lakhs for design, ₹1 lakh for testing, and ₹1 lakh for IP registration. The total value comes to ₹9 lakhs, reflecting the effort and resources invested in creating it.

RELIEF FROM ROYALTY METHOD: under this method the Trade Mark value is calculated based on the expected royalty earned from the same Trade Mark or similar Trade Mark or additional value on the wage of that particular Trade Mark.

FACTORS TO BE CONSIDERED

• Royalty Rate
• Revenue Attributable to the Trademark
• Economic Life of the Trademark
• Discount Rate
• Growth Rate of Revenue
• Additional Value of the Trademark
• Tax Implications

For example, the trademark "SunnyFoods" generates annual revenue of ₹20 lakhs, with an estimated royalty rate of 5%. Owning the trademark saves ₹1 lakh/year in royalties. Over its 10-year economic life, these savings are discounted to calculate the trademark's present value. 

A well-valued trademark strengthens a company's competitive position, enhances brand equity, and ensures that businesses can leverage their intangible assets effectively for growth, investment, and market expansion. Ultimately, accurate trademark valuation is essential for maximizing a brand's financial potential and ensuring its long-term sustainability.