In July, intellectual property (IP) advisor Ocean Tomo, LLC (US), updated its annual Intangible Asset Market Value (IAMV) Study. The report calculated the intangible asset value of the entire S&P 500 to be over 90 percent. To put it another way, it found that of the market capitalization of the largest listed U.S. companies, only about 10 percent could be attributed to tangible assets.

It is a striking statistic—how much higher could it get? Reports dating back to 1975 show a continuous upward trend.

Within that figure sits a vast amount of unreported value associated with company brands. This value is perhaps the least tangible of all assets, but nevertheless, it can be quantified by professionals working to an international standard. But for many trademark lawyers, how brand value is calculated is a mystery.

“Brand is often one of the most valuable assets within an organization,” confirmed Bryn Anderson, valuation director at Valuation Consulting (UK). “Therefore, if brands are so important, they need to be evaluated, managed, and valued much like other assets in an organization in order to ensure their protection and to maximize shareholder value.”

He believes lawyers should understand how effective they can be in leveraging the value of a brand.

Todd Williams, IP counsel, Stripe, Inc. (US), admitted, “This is not something I’m personally familiar with. A lot of trademark practitioners understand it exists but may not know the nuts and bolts of it.”

Old Versus Young Brands

Stripe, Inc., which builds economic infrastructure such as payment systems for the Internet, has seen phenomenal growth since it was founded in 2009. In March, the company announced it had raised US $600 million in funding at a valuation of US $95 billion.

Like Mr. Williams, Lisa G. Widup, senior counsel, Trademark & Copyright, Zoom Video Communications, Inc. (US), knows what it is like to work at a young, fast-growing brand.

The Zoom videoconferencing platform offers an interesting case study in brand value. Before the COVID-19 pandemic the company was known primarily as an enterprise or B2B brand. But with the advent of social distancing measures it became one of the best-known consumer brands in the world—so much so that market researcher Kantar (UK) included Zoom as a new entrant in its Kantar BrandZ Most Valuable Global Brands 2021. On the list, it leapfrogged half the field to the 52nd spot, with an estimated brand value of US $37 billion.

Ms. Widup confessed that, like many trademark lawyers, she does not know how to value a brand.

“A lot of lawyers—like me—probably went to law school because they didn’t want to focus their career on financials or accounting. Assessing brand value seems mystical because it’s so focused on putting numbers around an intangible asset,” she said.

The issue rears its head when she is asked for the trademark’s value when costing for a new trademark application in a country.

“Trying to put a number on it is very difficult. We can put together a budget on how much it will cost to do the trademark work, but this doesn’t necessarily tell you how much the brand is worth,” Ms. Widup explained.

Ms. Widup moved to Zoom last year as the sole in-house trademark lawyer during a period of stratospheric expansion. Zoom was established 10 years ago as an enterprise-focused company, and while companies are still its main customer base, the pandemic led millions of individuals to create accounts on its platform.

When Ms. Widup joined, Zoom had a very small portfolio of registrations—fewer than 20. Since then, the portfolio has grown to more than 100, with total filings at over 200.

This breakneck pace of trademark work will be familiar to many corporate lawyers working at young companies, and it plays directly into the brand value equation.

“Part of what you are doing is protecting the expected future value of the brand,” explained Mr. Williams. “You need to protect it from day one to build the pre-conditions for it to grow.”

Mr. Williams’ own experience of brand value changed when he switched jobs in 2019 to join Stripe, Inc. Prior to that he spent seven years at Turner Broadcasting System, Inc. (US).

Now he is at a company at a different stage of its journey. Founded 12 years ago, Stripe’s revenue topped US $7.4 billion in 2020, according to The Wall Street Journal. (Stripe, Inc. is privately held.)

Is brand value more important for newer brands, or even certain industries, such as luxury goods and consumer products?

“There is a misconception that there are only certain industries for which brand value is relevant, but my answer is no, this is relevant across the board,” said Mr. Williams.

When Legal Meets Brand Value

Mr. Anderson believes the role of trademark lawyers is changing, mixing the worlds of legal and brand value—and all for the better.

“They are seeing a lot more marketing material, and therefore gaining a superior understanding of the brand and what drives brand equity and value can only be beneficial for their role,” he said.

“They are starting to think around brand strategy and management in ways they possibly haven’t before,” he continued. “Lawyers being able to understand the principles of brand valuation will certainly help them in organizational conversations.”

Valuation Consulting undertakes many brand valuations for litigation, IP transfer, M&A and licensing purposes, which legal is “part and parcel” of, and therefore an understanding of brand valuation across different functions supports the valuation exercise.

This travels outside the organization, too. Mr. Williams sees internal trademark lawyers enforcing a brand as being an external voice of the company.

The important thing, he explained, is to use this brand voice to frame whatever legal work you are doing, particularly if it is seen outside the organization. He highlighted the carefully written cease-and-desist letters that position a legal request within a brand’s values or tone of voice, by way of example.

Widely reported examples are the letter sent by INTA member Christy Susman, counsel at Winterfeldt IP Group (US), on behalf of Jack Daniel’s, or the letter the legal team at Netflix’s Stranger Things sent to the owners of an unlicensed pop-up bar.

“Trademarks are important, but they don’t exist in a vacuum. I align very well with marketing on how the brand should appear and how we should talk about our mark, which is great,” said Ms. Widup, emphasizing that marketing and legal are “essential partners” in protecting and strengthening the brand both inside and outside the company.

How to Value a Brand

The first step in brand valuation is to define what is being valued, explained Bryn Anderson, valuation director, Valuation Consulting (UK).

“Defining what the ‘brand’ is and therefore defining what you are valuing is very important because one must recognize that the value a brand will bring to an organization is often greater than what can be packaged up and sold in an arm’s-length transaction, such as the sale of a trademark,” he explained.

On a simple level, Valuation Consulting defines the brand as the trademark plus the associated IP attached to that trademark. But there is also a broader brand value to consider, such as the ability of the organization to retain and attract staff because of its brand; or to secure better deals because of the brand’s reputation held by the government, suppliers, or other stakeholders; or the brand’s influence on garnering better borrowing arrangements than its competitors because of its standing with financiers.

All that comes under “brand contribution,” which valuers such as Mr. Anderson will quantify using established methodologies. He also employs commonly used calculations to derive the value of the narrower definition of the brand—the transferable asset. These are split into three most common methods: the cost approach, the market approach, and the income approach.

“All those approaches are trying to get to the same thing: looking at the fundamental business and trying to establish the stream of earnings associated with the brand, over and above other IP and other assets within the organization,” he emphasized.

It is also “imperative” that an analysis of the trademarks is undertaken to establish the specific legal rights to the trademarks that are the subject of the valuation, according to Mr. Anderson.

“Under ISO 10668, the International Standard for brand valuation, the valuer must apply the most appropriate method in each case. We may use multiple approaches, but most commonly a single approach is undertaken,” he said.

“One must always, in my view, do a brand valuation within the constructs of a business valuation, that is, putting a value on the brand within the context of the business in which it operates. This provides a good brand valuation sense check, but more importantly, I would argue that one needs to understand the underlying business in order to understand and value the brand asset.”

Royalty Relief

Within the income approach is a method called royalty relief, which is most widely used and regarded because it is “grounded in commercial reality,” explained Mr. Anderson.

Based on the notion that a brand owner is relieved of paying any royalties from using its brand because it owns the rights to it, royalty relief posits that if the company were not the owner and had to license the brand, what would it have to pay?

According to Mr. Anderson, “There are multiple ways to triangulate the royalty rate. It’s a pivotal figure in any brand valuation.”

“It’s an exercise in trying to understand an appropriate royalty rate a licensee would have to pay in an arm’s-length transaction for the brand,” he explained. “We look for comparable arm’s-length brand licensing agreements across the brand’s sector to get a sense of the range of rates being paid for similar brands. However, it can be more difficult to find comparable rates in some sectors than others.”

Once he has figured out a royalty rate range, Mr. Anderson then looks at other factors, such as how strong the brand is within the market, how it is perceived, competitive performance, trademark protection, investment, and financial performance, to inform a final appropriate royalty rate.

The royalty rates seen in comparable agreements can be sense checked against industry margins as a test for affordability, based on a rule of thumb analysis which states that, on average, a licensee would expect to pay between 25 and 33 percent of operating profits for access to the IP.

When the valuer has a royalty rate, normally expressed as a percentage of revenues, it is then applied to future revenues to establish a future stream of annual royalty earnings, which is then discounted back to a net present value, giving a final brand value.

Brand Value Basics: A Guide

Cost approach: valuing the brand by understanding the historical cost of creating the brand or replacing the brand. Excludes the economic benefit brought to the business by the brand. Not widely used.

Market approach: based on historical, comparable transactions within the brand’s sector. Difficult to find truly comparable brands.

Income approach: determines the future earnings dedicated to the brand based on the future forecasts of the business. This approach comprises:

• Royalty relief: most widely used method. Calculates future royalty earnings against the brand, discounted back to a net present value. Trusted by accountants.
• Price premium effect: capitalization of future profit stream premiums attributable to a business’ brand above the revenues of a generic business, without a brand. Can be difficult to find a non-branded comparable. Market research that questions consumers can be useful.
• Multi-period excess earnings: seeks to discover the proportion of a company’s earnings attributable to the brand, after taking a charge for all other assets employed in the business. Very effective but requires the valuation of other IP assets. Less effective if the brand has low profits or is loss-making.

For more on this topic, attend the panel session From Cost Center to Front-and-Center: How to Understand (and Explain!) the Value of Your Brand (today, November 16, 9:25 am–10:30 am EST).

Moderator: Todd Williams, IP counsel, Stripe, Inc. (US)

Speakers:

• Bryn Anderson, valuation director, Valuation Consulting (UK)
• Katelyn Andrews, trademark counsel, The Coca-Cola Company (US)
• Lisa G. Widup, senior counsel, Trademark & Copyright, Zoom Video Communications, Inc. (US)

Video courtesy of Envato Elements / FlashMovie