1. Introduction: the importance of evaluating intellectual property assets
The value represented by intellectual property assets within companies is considerable and steadily growing. It has risen from accounting for 17 percent of companies’ market capitalization in 1975 to 90 percent in 2020. In other words, intangible assets now account for almost all the value of publicly traded companies.
Among intangible assets, the brand is often the dominant one, capable of reaching substantial figures. To give a few examples, Nike’s brand value (53.77 billion euros) accounts for 43 percent of the company’s value; Apple (502.68 billion euros) stands at 14.5 percent, while Coca-Cola (58 billion euros) is worth 19 percent.
Most often, however, the value of intangibles is hidden and not reflected in corporate balance sheets. This is because international accounting standards (IAS) generally favor the conservative approach of accounting at historical cost rather than current value.
As a result, by a curious paradox, intangible resources, which are the basis of the value creation process and account for very high percentages of companies’ market capitalization, are at the same time a major cause of imperfection and distortion of financial statements. Due to the specificity and critical nature of the process of valuing intangible assets, most companies do not manage, measure, express or monitor the value of these resources, which are of considerable, if not vital, importance in value generation.
However, knowing the value of one’s brand is useful on a number of occasions, such as in the event of a sale/acquisition, in the event of liquidation of the company, for management purposes, for damage calculations, or even to provide collateral for a bank loan.
2. Trademark valuation method: at the crossroads between law and economics
Brand valuation process is quite specific and is characterized by several critical factors that justify, at least in part, the reluctance of banks and investors to rely exclusively on these assets in providing financing.
On the one hand, the absence of a liquid and transparent market such as the real estate market does not allow the value resulting from an appraisal to be confronted with comparables. On the other hand, the trademark, like any intellectual property right, is a “fragile” object, being both an intangible with changing and volatile contours and an exclusive right subject to the alea of justice and the choices of the legislator. Consider, for example, everything that can undermine the validity of a trademark and that is sometimes beyond the control of its owner: nullity, cancellation, genericide, etc.
For these reasons, the valuation of a trademark, like that of any intellectual property asset, requires both economic and legal expertise.
The valuation of a trademark consists of two stages: qualitative analysis (a) and quantitative analysis (b).
a. Qualitativa analysis
Qualitative analysis is in turn composed of a legal analysis, a market/marketing analysis, and an analysis of the company’s value creation process. This analysis lays the foundation for the quantitative analysis, influencing the choice of various parameters, such as discount rate and discount period, growth rate, cash flows, etc., and thus the final value.
i. Analysis of legal protection
The objective is to determine the “strength” of the trademark rights and to identify any potential risks. Indeed, it should not be forgotten that protection is always the basis of value: insufficient or absent protection can affect value to the point of neutralizing it entirely.
At this stage we assess the distinctiveness of the trademark, its use, its territorial scope, any conflicts with third-party rights, and any contracts affecting it (e.g., coexistence agreements, licenses, etc.).
ii. Market/marketing analysis
The objective is to assess the brand’s presence in the market, taking into account competition, advertising campaigns, customer loyalty and brand positioning.
Specifically, the level of competition, the stage of the product/service cycle and market outlook should be assessed, as well as the brand’s awareness, the values communicated and its strategy for the future.
iii. Analysis of the company's value creation process
To have value, a brand must generate measurable economic benefits. At the same time, its value must not overlap with the value of other intangibles.
The brand should therefore be isolated from other intangible assets (e.g., patents, domain names, customer base, etc.), with the goal of mapping the company’s intangible assets and resources and determining the contribution of each to the value creation process.
b. Quantitative analysis
Quantitative analysis enables to determine the financial value of the brand using different valuation methods. The expert’s role is to identify the most appropriate method based on the characteristics of the brand to be valued, the available accounting data, and the purpose of the valuation.
To simplify, we can identify three main families of valuation methods.
i. Cost-based methods
Cost-based valuation methods aim to determine the cost of creating or replacing a trademark. In general, these methods are not suitable for valuing a trademark as a going concern, since there is rarely a linear relationship between the cost of protecting a trademark and its value. However, this family can be useful for valuing trademarks of a company that is struggling or has ceased operations.
ii. Methods based on income flows
These methods are based on discounting the future cash flows generated by the brand. Among the various methods, two main ones are:
1. Differential cash flow methods
These valuation methods calculate the value of the brand by discounting the differential cash flows it generates compared to identical “unbranded” products or services over a given period. These methods are considered among the most accurate because they enable to accurately “extract” and “isolate” the value of the brand.
2. Royalty-based methods
Valuation using royalty methods discounts the royalties that the company would have to pay if it were to license an equivalent trademark over a given time frame. Royalties are extracted from specific databases and selected based on qualitative parameters such as industry and brand recognition.
iii. Methods based on multiples
The valuation of a brand using multiples consists in multiplying a financial indicator (e.g., EBITDA) by a multiple obtained from analyzing comparable transactions or assigning a qualitative score to the brand. Among these methods, the Interbrand method is by far the most widely known, and its procedure is described below.
Step 1: Assigning a score to the brand on a scale of 0-100:
– Market leadership: 0-25
– Stability-consumer loyalty: 0-15
– Stability of market demand: 0-10
– Internationality: 0-25
– Market trends: 0-10
– Marketing investments: 0-10
– Legal protection: 0-5
Step 2: Determination of the multiple between 0 and 20 by reporting the score on an “S-curve.”
Step 3: Multiplication of the multiple by the revenue attributable to the brand.
When conducting an evaluation, it is always advisable to use at least two methods to have a control method.
3. Conclusion: more trustworthy valuation processes for a more present intellectual property
The hope is that the adoption of multidisciplinary, transparent and recognized valuation processes will lead to reliable valuations that are accepted by banks and investors, so that intellectual property will be rewarded for its value-creating role from a financial perspective as well.
Some countries, such as Singapore, have already taken this path and created a real ecosystem for direct financing through intellectual property (IP-backed financing: IPOS | WIPO Report Series: Unlocking IP-Backed Financing: Country Perspectives. Singapore’s Journey). Italy, on its side, has allowed companies not subject to IAS to measure intangible assets in their financial statements since 2020.[1]
