Trademark’s value: what determines it and why is it important?

Authors: Kristina Vilkiene, Assistant Attorney-at-Law in METIDA, Inga Lukauskienean Associated Partner, an Attorney-at-Law and a Patent Attorney in METIDA

valueAccording to one saying, an intangible asset is the hardest to protect, therefore, it is also difficult to evaluate it. Thereby, how to assess the value of such intangible asset as a trademark, and why should this be done?

On the current market an intangible asset is company’s commercial advantage. A trademark creates a value by impacting on loyalty, the use of services or the buying of goods. Consequently, it also increases the possibility to determine higher prices in the market for services and goods. However, companies usually concentrate on the accounting of current assets and the usual auditing procedures carried out by the auditors are oriented towards the evaluation of company’s financial accountability. And thus, considerations whether the intangible asset is appropriately assessed and used are often forgotten. This is why the intangible asset is usually left in the ‘grey zone’.

Meanwhile, trademarks in addition to contributing to the market’s value can be used in circulation in order to increase the capital.

Why is evaluation necessary?

Evaluation provides a possibility to enrich with the knowledge about the available intangible assets and it also helps proprietors to effectively and optimally use them. The evaluation of a trademark is also crucial when assessing market value, its image and financial situation.

The main questions which have to be considered before the beginning of the evaluation are these:

–          What is the goal of evaluation?

–          How the trademark is and will be used?

–          Who is a potential trademark purchaser?

Usually the need for trademark’s evaluation arises when the trademark is intended to be bought, sold or licensed, since in this way one naturally questions, what could be the price of such transaction.

The use of the previous, current and future trademark is directly connected to the evaluation’s premise – is the trademark going to be used in the same way as it has been used so far or whether its use will change? The general evaluation’s premise is the ‘best use’ concept according to which the trademark is evaluated to its highest level considering prospective circumstances regardless of the current use.

What value would be considered as appropriate and reasonable?

The most common standard of evaluation is the standard of a ‘fair market value’, which is generally described as a price which the purchaser and the seller who want to create a transaction would be willing to set in order to create such a transaction. Also, it is necessary that every party has the required information and that no party would be forced to create this transaction.

The alternative evaluation standards include a ‘fair value’, which is often used in courts’ decisions when the amount of compensations is determined.

What evaluation methods are usually used to assess the trademark’s value?

Assessing the value of trademarks as well as other intellectual property or intangible objects is complicated, because there are several methods how to run this process. The trademark is not used by itself, therefore its value is directly dependant on the rest of the company’s capital including company’s produced goods or supplied services. The methods also differ depending on the type of business.

The choice of the evaluation method primarily depends on its goal. In other words, the estimation of the value for preparing financial reports or transactions will differ depending on whether the value is estimated during a legal conflict or bankruptcy procedures. However, most of these evaluation methods begin when the company is being created together with a trademark and when the existence is being assessed. The perception of the development of a retrospective business and a particular trademark helps to choose the best methodology of the evaluation. While choosing, the general description of the capital and its use and the consumers of the goods or services that the trademark marks are taken into account.

One of the possible methods of assessing the trademark value is the evaluation of the income. When this method is applied, the resources of the income or the capitalisation of the income are usually assessed  in order to calculate the expected profit in the future.

Based under the market’s value method, the values of similar trademarks on the market are compared. The choice between the compared trademarks depends on the type and the sector of business. When the compared trademarks are chosen, trademark’s sale and purchase transaction sums or received (paid) certified taxes for these trademarks are assessed.

When the method of the cost evaluation is applied, the value of a trademark is assessed by calculating the costs which would be required in order to produce this trademark again.

Risk which occurs due to inappropriate assessment of trademark’s value.

As it was previously mentioned the need to assess trademark’s value can be various. Specifically, this need may occur due to the evaluation in pursuance of increasing investments, the preparation for business transactions (the merger or the separation of companies), the purchase, sale or a licensing of a trademark.

The appropriate assessment of trademark’s value and its transfer is especially important when trademark’s proprietor is experiencing financial difficulties and a bankruptcy may occur. In practice, cases when the trademark marking company’s goods and services is transferred to a different company or company’s head’s private ownership are quite common. Theoretically, this transfer of the trademark rights is possible and does not conflict with the requirements of laws if it also does not conflict with the interests of company’s shareholders and creditors. The unpaid trademark transfer or its sale for a small price which does not match the real trademark’s value would be considered as conflicting with the previously mentioned interests. In this case, with shareholders and creditors’ request the court can acknowledge such transferring of trademark rights as invalid.

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