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Different Approaches of the Trademark Valuation

There are three basic approaches in determining the Trademark Valuation and which are given below:

Cost Approach:

In many circumstances, valuation analysts focus on the advertising and marketing costs required to build the same or a comparable trademark when estimating the cost to replace a brand’s future service capabilities. The fundamental idea behind the emphasis on advertising and marketing costs is that a trademark’s value depends, at least in part, on how well-liked customers find the brand in the areas where it is utilized. Costs associated with marketing and advertising are frequently essential to developing a brand’s strong reputation, which can then lead to price premiums and/or market share increases. Of course, additional expenditures like license fees and legal costs, among others, may also be relevant to the analysis.

Any trademark expiration present as of the Trademark valuation date should be taken into consideration as well. For instance, the valuation analyst may want to only consider historical costs incurred to achieve the same level of popularity the trademark enjoys as of the valuation date, excluding costs associated with helping the trademark reach a peak level of prominence that is no longer applicable. This is the case if one is valuing a trademark that was more well-known in the past than it is as of the valuation date.

Market Approach:

It is difficult to evaluate a trademark using the market approach for at least two main reasons:

  1. Very few trademark sales are publicly available for use in determining transactions and amounts paid for comparable properties.
  2. Due to the inherent originality of trademarks, it can be challenging to determine how well one property can be compared to another that is quite similar. How can a valuation analyst account for the differences between Coca-Cola and the comps to generate an indicator of value if they are seeking to value the Coca-Cola® trademark based on prices paid for other soft drink trademarks?

One way to address the differences between the trademark valuation and the comps is to evaluate various aspects of the relevant trademarks, including but not exclusively the following:

  • The amount of profit generated from products bearing the trademark
  • The size of any price increase that was obtained for the products for which the trademark was used
  • The scope of the trademark’s past and projected future applications across several product categories

The valuation analyst may be able to make an informed decision on how to use and/or change the comps to account for significant variances by analyzing these features, while still relying on the Market Approach to arrive at a value estimate.

Income Approach:

The valuation analyst must determine the present value of future incremental cash flows attributable to the trademark valuation in order to implement the Income Approach. The following are the key variables that must be determined in order to achieve this goal:

  • Using a trademark strategically for things like product sales, licensing, enforcement, or defense
  • Amount of Cash flows
  • The start and end dates of the cash flows, as well as their overall timing
  • The cash flow’s potential risks

The use of the trademark in the sale of one or more items with which the brand is linked is often included in the nature of the cash flows associated with the trademark. There are several ways to calculate the amount of the additional cash flows that may be attributed to the trademark for this business model.

The valuation analyst must carefully examine how far into the future the cash flows should be simulated when determining the timing of the cash flows for the Income Approach implementation. As long as it is utilized in commerce to identify the source of goods and services, a trademark may be used permanently.  While a trademark may technically have an endless life, in some situations, trademarks are expected to have a shorter lifespan. The discounted cash flow model should, where applicable, take this assumption into account. To ascertain the trademark’s remaining useful life, the valuation analyst should collect data relating to the trademark owner’s past usage of the asset and anticipated future use of the asset.

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