Here is a question that entrepreneurs and managers tend to arise.
How to determine the value of your trademark? The answer is more complex than it first appears … Let’s try to get some perspective on the methods used to estimate trademarks’ value…
Determination of trademark value
We consider here that a brand is a constituent element of any business and that the trademark you registered is considered as a commercial brand supporting the development of your activity.
To determine the value of your trademark we have to consider the following elements:
- The geographic situation of your activities (regional, national, European, international…)
- The budget allocation for commercial and marketing development
- The notoriety of your company or brand
- The current and future operating modalities of your brand
Finally, we have to take into account the economic context and the different studies concerning the evolution of trademarks’ valuations in your sector.
Trademarks’ valuation methods are extensive.
Hence, it is possible to proceed to valuations based on:
- development investment cost, marketing cost, and advertisement cost over a given period
- Replacement cost
- market prices when looking at business transactions,
- future and potential earnings (Price premium method, royalties’ method, net present value,…)
- The multi criteria valuation of the brand’s strength (market positioning, established character of the trademark, market growth, quality of brand image and notoriety, strength of the product, brand extension potential, internationalization potential, legal protection, business potential…)
ISO 10668 standard specifies that “the value of a brand must represent the economic benefit generated by the brand over its expected economic life”. This standard therefore favors the income approach: “in general, the monetary value must be calculated by reference to cash flows”. More specifically, these flows “must correspond to the cash flows reasonably attributable to the brand”.
1 – Methods using market multiples
The market multiples method consists in:
- studying, in your industry or in a close or similar industry, companies with comparable business models or business lines and with a similar size,
- collecting accounting and financial data,
- studying the performance of the companies we identified ,
- calculating the relevant multiples and ratios.
In this context, we will use the data enabling us to establish the most relevant multiple linked to the valuation of your brand, by taking as a reference revenue, gross margin, current income before tax, net income by group, etc.
Additionally, we analyze the operating territories and the brand’s positioning to modulate these multiples.
2 – Market approach
This method is based on market observation and actual valuations of comparable brands known through business transactions or public accounting data.
This is an approach that requires specific market-related data. It is generally based on ratios enabling to estimate the value of the target brand based on the values of brands or companies in the same industry. We then take into account a risk premium according to this industry.
We compare and transpose these data and ratios in order to estimate the value of a brand considering its specific characteristics (market, territory, reputation, specific activity). Of course, the size of the competing companies is also considered.
This method should be used cautiously and exclusively to value brands of similar companies operating in the same industries and markets. Their selection must be rigorous and allow the constitution of a precise, and as far as possible transposable, reference sample. This transposition is often based on ratios reduced by a discount rate related to your company’s size and the market where it operates.
3 – The “relief from royalties” method
Here we assess the royalties amount that the company would have to pay according to a (hypothetical) licensing agreement in the case it did not own its brand.
Here again, it is necessary to consider the industry, the territory, the reputation of the licensed brand and the developments planned .
This method is based on actual commercial contracts or contracts in progress. We also analyze similar licenses concluded in identical territories and under comparable or similar operating conditions.
The purpose of analyzing this data is to define the theoretical royalties that could be granted under a trademark license signed with comparable conditions. We establish, over a given period, a theoretical average royalty rate. Then we apply the discounted royalty flow method.
The value of the brand is thus determined on the basis of the sum of the future royalty flows net of discounted taxes, increased by the discounted residual trademark value.
We consider that the duration to be used is correlated to the theoretical brand lifetime. In a nutshell, this valuation process is based on the following steps:
- analysis of an estimated revenue;
- setting the royalty rate;
- calculation of the discount rate;
- determination of the brand value.
The determination of the royalty rate is important. This rate varies according to the type of license and the market.
Indeed, it is not uncommon to find that the royalty rate is lower in low-margin activities such as food and mass distribution activities, than in high-margin activities such as luxury goods activities.
The discount rate is determined from the risk-free rate, market profitability, market risk premium, beta and the resulting cost of capital.
4 – Methods based on price or volume premiums
These methods follow the same logic and consist in observing the price or volume differentials that the company can benefit from on the products or services marketed under its brand, compared to comparable generic products or services.
ISO 10668 standard recommends analyzing these two economic advantages jointly. This is to ensure that the additional costs or expenses of promoting and protecting the brand are properly taken into account, and that other independent factors do not explain the observed differentials (such as the characteristics or quality of products and services).
5 – Methods based on income, overprofits or flows.
Based on profit generation, these methods consist in estimating the portion of the company’s profits that can be attributed to its branding strategy, after deducting the costs of its tangible assets and its working capital requirement. It is a matter of assessing income sharing, economic overprofits or the resulting cash flows.
As mentioned above, other methods will focus in a very basic, but more debatable way, on the brand’s development costs based on the investments made.
I need to merely get an estimate of my brand. Isn’t there a “magic formula” to value my trademark?
As you can see, the methods are diverse and many factors must be considered to fully appreciate the value of a brand. These studies are quite extensive. Depending on your needs and the context, the expert adapts his approach and methodology. This requires quite an investigation and analysis.
If you want to have a quick idea of the financial value of your brand, we have developed a fast and efficient service – and at a lower cost – on our IP’Nuts platform, in order to obtain an indicative estimate of the value of your brand.