Valuing trademarks was recently the first order of business at a meeting regarding a new Internet based start-up. The usual suspects were in attendance including advertisers, marketers, investors and accountants. After the presentation, one of the investors asked the presenters, “What about the IP?”. The investor was referring to the fact that the presentation had not covered any type of proprietary intellectual property rights. To which I offered the response “there is no intellectual property “. I did not mean that there was no creativity in the expression of the concept. What I meant was that there is no inherent value in intellectual property. The fact is that intellectual property has no default monetary value, it acquires economic value when it is properly exploited by its owner(s). So how does one value intellectual property, particularly valuing trademarks which is the subject of this article? Below are 5 important tips when valuing trademarks in an Internet based company so as to evaluate the merits of an investment.
1. Valuing trademarks and the underlying goods and services
In the case of a trademark, the value is created by the perception of the successful underlying goods and services that it represents within a market place. Take Ali Baba, there is much speculation about Ali Baba’s share offering and underlying market capitalisation valuation, the range I have come across is between $155 to $200 billion.
Whatever the actual market capitalisation on the day, it will be one of the largest technology initial public offerings in history. ALI BABA.COM registration number: EU001332899 was registered on the 26 October 2001 with a US priority date of July 1999. Several other marks have been registered in the ALIBABA group of marks in various classes of goods and services, the last in 2014.
However like all technology businesses a significant proportion of Ali Baba’s valuation will be apportioned to its intellectual property such as valuing trademarks. This is not to ignore Ali Baba’s respectable profit of $2billion in the quarter ending June 2014:
Alibaba Group made a profit of nearly $2 billion on revenue of $2.5 billion in the quarter ending June 30 according to its latest filing. Revenue rose 46 percent from the same period a year earlier.
$2billion profit alone does not make a valuation of $155 billion. It is the potential of Ali Baba that the investors are betting on. Investors’ risk appetite will be based as much on an assessment of the value of the trademarks and any other intangible assets of Ali Baba than any of its tangible assets.
But what was the value of the brand Ali Baba when it first started trading? The answer is $0. However once the underlying business starts to receive success and favour in the market place, the value of the trademark increases. The trademark will contribute to the profitability of the underlying business and that contribution can be measured.
One of the other basics in assessing a valuation for a trademark is in being able to identify the various ways in which it can be monetised. The uniqueness of intellectual property rights is that they can be exploited in a variety of ways. They can be licensed to several people at once; exclusively to one person; in different jurisdictions or restricted to a single geographical area; restricted in time and period; assigned outright or licensed for a specific use. Infact the ways of exploiting intellectual property are limited only by your business strategies and expertise.
Obviously, the only way we could reliably be certain of the value of a trademark is if it was actually independently bought and sold in the open market place. Therefore unless an actual trade occurs any valuation is no more than an estimate or opinion of the actual value. Valuation of a private company’s shares has the exact same basic premise. Clearly, privately-held companies issue their shares to a select group of shareholders. The list of shareholders are usually, family, friends and angel investors. But as soon as institutional investors take a stake, the share valuation becomes more realistic as it is usually a more reliable indication of the actual market price of the stock, if it were bought and sold publicly.
3. What will it be worth?
Valuations are limited to the future. There is no interest in what the trademark used to be worth but its value into the future.
4. Fair Value Measurement
There has long been a tension between accountants who argue that intangible assets should not be included in the company balance sheet and investors that argue that they should. The International Accounting Standards Board (IASB) introduced the concept of fair value to deal with intangible assets as an international accounting standard. Essentially the price that would be recorded to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measured date – Trademark Valuation Smith-Richey Second Edition -.
Fair Value is the basis for the purchase price allocation and it involves one or all of the following elements: (i) Cost of reproduction (ii) Cost of replacement (iii) Cost of reproduction/replacement less depreciation (iv) Original cost (v) Book cost and (vi) Tax basis.
5. Valuing trademarks methods
In brief there are 3 types of valuation methods. (i) The market valuation (ii) The cost method (iii) The income method.
Generally, when an investor buys equity in an internet business or in any business, they do so with the intention of making a profit. Most investors are looking for a return of and on. They are seeking a minimum return of the initial value of their equity stake and some financial gain on their investment. A crucial element in being able to achieve these objectives is knowing the value of the business you are investing in. Investing in an overvalued business significantly increases the risk of not achieving investment objectives. Getting a valuation right on the other hand significantly reduces the risk of an unsuccessful investment. Applying some know-how into assessing the market value of the brand that you are investing in, is crucial in support of a well informed investment decision.
If you like this article then you might like our articles on:
The writer has specialised in commercial law related to the Internet since 1999, and has had extensive first hand experience of Internet based companies as senior company lawyer for various Internet companies including a public company.
To book a face to face consultation for specialist advice regarding trademarks (charge rates may apply and may vary).