This article has been written by Sangita Sengupta pursuing a Diploma in US Intellectual Property Law and Paralegal Studies from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction 

Brand valuation and licencing form an indispensable part of the business strategy for the growth of any company today. A bundle of intangible assets that creates an impression of a company in the minds of consumers becomes the brand of that company. These include, but are not limited to, domain names, product design rights, logos, trademarks, slogans, catchphrases, trade dress, packaging, copyrights in associated colours, smells, sounds, descriptors, and logos, and advertising material that forms a major part of a company’s net worth. Exclusivity in a market gives any Brand a competitive edge. Such exclusivity is generated by seeking legal protection of the Intellectual property associated with the Brand, thereby stopping others from piggybacking on their goodwill. Extensive risk analysis and due diligence are necessary to ascertain the various laws and measures in place to safeguard a brand’s intellectual property rights.

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In summarising the international best practices and  principles to be followed for brand valuation, ISO 10668-Monetary Brand Valuation 2010 stresses legal analysis along with financial and behavioural analysis.

In this article, we will discuss various IP valuation methods, their suitability in different business strategies, and the key considerations to be taken into account while drafting a licencing agreement for a brand.

Need for brand valuation

In today’s competitive business landscape, brands have become invaluable assets, representing a significant portion of a company’s overall value. Brand valuation has emerged as a crucial practice that provides numerous benefits to organisations. Here are several reasons why brand valuation is essential:

Quantifying brand assets

Brand valuation enables companies to quantify their intangible assets, such as brand recognition, reputation, and customer loyalty. By assigning a monetary value to the brand, organisations can make informed decisions regarding brand investments and strategies.

Mergers and acquisitions

Brand valuation plays a vital role in mergers and acquisitions. It helps determine the fair value of a company, ensuring that both parties involved in the transaction receive a fair deal. Accurate brand valuation ensures that the acquiring company pays a reasonable price while the selling company receives adequate compensation for its brand.

Licencing and franchising

Brand valuation is crucial for companies engaged in licencing and franchising. It establishes the appropriate royalty rates and fees associated with the use of the brand, safeguarding the brand owner’s interests while providing clarity to licensees and franchisees.

Brand performance evaluation

Brand valuation serves as a benchmark for evaluating brand performance over time. By tracking changes in brand value, companies can assess the effectiveness of their marketing efforts, monitor brand health, and identify areas for improvement.

Financial reporting

In certain jurisdictions, companies are required to disclose their brand value in financial statements. Brand valuation provides a reliable basis for such disclosures, ensuring transparency and compliance with reporting standards.

Investment decisions

Brand valuation assists investors in making informed decisions regarding potential investments. It provides insights into the strength and value of a company’s brand, helping investors evaluate the potential return on their investment.

Strategic planning

Brand valuation is a key element in strategic planning. By understanding the value of their brand, companies can develop strategies that leverage brand strengths, differentiate themselves from competitors, and maximise brand equity.

Brand protection

Brand valuation supports brand protection efforts. A strong brand valuation can deter potential infringers and counterfeiters from exploiting the brand, as it demonstrates the significant financial consequences of unauthorised use.

Employee motivation

A valuable brand can boost employee morale and motivation. When employees recognise the strength and value of the brand they work for, it instills a sense of pride and promotes a positive work environment.

Competitive advantage

In a highly competitive market, a strong brand can provide a distinct advantage. A well-valued brand attracts and retains customers, builds trust, and commands a premium price.

How to licence your brand

Licencing your brand under intellectual property (IP) rights can be a strategic move that allows you to expand your reach, generate revenue, and establish brand recognition. Here’s a comprehensive guide to help you navigate the process of brand licencing:

1. Assess your brand’s potential:

  • Evaluate your brand’s unique attributes, strengths, and market value.
  • Determine if your brand has the potential to be licenced to other entities.

2. Identify licencing opportunities:

  • Research potential markets, industries, and partners where your brand could align well.
  • Look for companies that complement your brand’s values and target audience.

3. Protect your IP rights:

  • Ensure your brand name, logo, and other elements are legally protected through trademarks, copyrights, and patents.
  • File for IP protection in the countries where you plan to licence your brand.

4. Develop a licencing strategy:

  • Define your licencing goals, whether it’s brand extension, revenue generation, or market expansion.
  • Determine the scope of the licence, including product categories, geographic territories, and duration.

5. Create a licencing agreement:

  • Work with legal counsel to draft a comprehensive licencing agreement that outlines the terms and conditions of the partnership.
  • Specify royalties, fees, quality control measures, and termination clauses.

6. Select the right licensee:

  • Evaluate potential licensees based on their reputation, financial stability, and commitment to your brand’s values.
  • Conduct due diligence to ensure the licensee aligns with your business objectives.

7. Negotiate the terms:

  • Negotiate the terms of the licencing agreement, including royalties, minimum guarantees, and marketing support.
  • Ensure fair compensation and protection of your brand’s integrity.

8. Manage the licencing relationship:

  • Establish clear communication channels with the licensee to maintain a positive working relationship.
  • Monitor the licensee’s use of your brand and enforce compliance with the licencing agreement.

9. Monitor brand usage:

  • Regularly review the licensee’s products, marketing materials, and customer interactions to ensure they align with your brand standards.
  • Take appropriate action if there are any violations of the licencing agreement.

10. Evaluate and renew:

  • Periodically assess the success of the licencing agreement based on pre-defined metrics.
  • Consider renewing or renegotiating the agreement based on performance and mutual benefits.

By following these steps, you can effectively licence your brand under IP rights, create new revenue streams, and extend your brand’s reach while maintaining control over its reputation and quality.

IP valuation

IP valuation plays a pivotal role in the negotiation table for brand licencing. An IP valuation report ensures an enlightened negotiation on the terms and conditions of the proposed licence. A company decides on their course of action based on the IP valuation report in case of an infringement, i.e., whether to go for a court action, take to mediation or arbitration, or licence. The quantum of damages and deciding whether to quantify damages based on the profits made by the infringer using the asset or a fair royalty decided on the valuation report.

Prerequisites IP valuation

Before starting the valuation, we need to identify the IP assets of a brand. The IP associated with the Brand must have some tangible manifestation in the form of a contract, a licence, a registration document, a computer diskette, a listing of customers recorded on a set of financial statements, etc. It should have been created and will terminate at an identifiable time or as a result of an identifiable event. It should be legally enforceable and transferable. The asset should be able to generate income independently of the other assets of the company and can be sold separately.

IP valuation is condoned by certain factors:

  • Premise of valuation: circumstances under which and the purpose for which the valuation is made.
  • Time or date of valuation: Whether it is made at the beginning when the asset is created or at a time nearing it’s expiry
  • Nature, scope and Strength of the IP assets
  • The type of valuation method applied

Various valuation methods

Cost method

The cost method determines the value of an IP asset by calculating the cost of developing the same or similar IP asset either by reproduction of the exact asset or replacement with something that has the same utility as the IP at the time of valuation.  The cost incurred in the procurement and development of the IP is adjusted to inflation and discounted for obsolescence. Obsolescence in the case of IP may be functional, technological, or economic.

  • Functional obsolescence: It happens when the use and maintenance of the IP incur excess operational costs compared to the alternatives available on the market. 
  • Technological obsolescence: It happens when the technology becomes outdated at that point in time.
  • Economic obsolescence: It happens when the IP can no longer sustain an adequate return on investment.

Cost method valuation is generally done for internal bookkeeping purposes or as a supplementary method to the income method. This method is used when the IP is no longer generating a return.

Market method

This valuation method is based on the actual price of a similar IP asset in the market under similar circumstances. This kind of valuation requires an active market for the asset, price information, identical IP assets, and variables to control for the differences between the actual IP and the similar IP, if any.

This kind of valuation is usually done during cross-licencing, licencing during settlement, etc. Stringent due diligence is required for the accuracy of this method. The determining factors here are the variables that control the differences between the actual IP and the similar IP.

This method most likely predicts the market value of an IP, thereby better representing the market sentiments for its associated brand.

Income method

In this type of valuation, the projected economic income of the IP asset is discounted to its present value. The economic income is determined by determining the projected revenue flow of the IP in the rest of its remaining useful life, offsetting that with the cost incurred in maintaining the IP asset, and then discounting the amount of income to its present-day value by using the discount rate. The measure of economic income varies from case to case, so the discount rate should be in sync with the measure of economic rate used.

Brand licencing

Licencing is a crucial tool in business relationships.  Companies licence some or the entire bundle of IP assets associated with a brand in collaboration with one or more enterprises, who may be vendors or subcontractors in the supply chain, or when they collaborate on a strategic alliance or joint venture or enter a new geographical market or business. Often, to avoid expensive lawsuits, the infringer is coerced into being a licencee.

There are basically three types of licencing that companies engage in:

  • Licencing in:
    • This happens when a company acquires IP assets from an external source, like other companies or collaborators.
  • Licencing out:
    • This happens when a company gives permission to external sources like contractors or franchisees to use their IP assets for expansion of the business or entering a new market.
  • Cross licencing:
    • This happens when two companies mutually licence their IP assets to each other.

Brand licencing agreement: key considerations

A brand licencing agreement is a contract that allows one party (the licensor) to grant another party (the licencee) the right to use its trademark, logo, name, or other distinctive features of its brand in exchange for a fee or royalty. A brand licencing agreement can be a lucrative way to expand the reach and recognition of a brand, but it also involves some risks and challenges. Therefore, it is important to consider the following points when drafting a brand licencing agreement:

Definitions section

The definitions reflect the parties’ understanding and intention of certain words and phrases when they signed the licence agreement, which is the relevant time for interpreting the true purpose or intent of the parties under the licence agreement.

Scope of rights clause

This section defines the scope of rights. The licensor may choose to provide exclusive or non-exclusive licences, which may further include other limitations like territorial limitations, product or service limitations, market sector limitations, and the duration for which the licence is valid.

Financial clause

This clause defines the payment arrangement, whether it be an upfront lump sum payment, a royalty payment, or both. The provisions of the royalty section also include the timeline of royalty payments, penalties for not meeting the timeline, tax issues, interest on outstanding payments, and the method of payment.

Variation, alternation, amendment, and waiver clause

This clause clearly states the scope of variation and alteration that can be made in the agreement after it has been executed and the people with the authority to make such alterations. 

Trade name

Licencees or sub-licencees are allowed to use one or more of the trademarks that are licenced under the trademark licence agreement in their trade name or corporate name. On termination of such a licence agreement, the licencee often does not take steps to remove such a trademark. Thus, a clause mentioning the name of the person among the licensors, with the power of attorney on behalf of the licencee, will execute measures to delete the relevant trademarks.

Return of materials

This clause ensures the immediate return of the confidential information provided to the licencee during the course of the agreement upon termination of such agreement.

Responsibilities of the parties

The licensor must lay down the quality standards for the licencee to enforce for the intellectual property that is licenced. This ensured the brand’s connection to the source company remained relevant and, thereby, it’s exclusivity. In cases of third-party infringement, the responsibility of the licencee and licensor to counter that should be clearly laid out in the licencing agreement. The non-compete clauses during the term of the agreement and post-termination should also be clearly mentioned in the agreement for each jurisdiction. 

Termination issues

This clause should include a list of conditions, the abuse of which may initiate termination of licence agreement. This also includes obligations of the licencee post-termination of the licence.

Conclusion

In the current age of the knowledge economy, IP assets is equally valuable as physical assets. Thus, understanding the interplay of the nuances of intellectual property assets’ valuation and licencing is imperative to strategising the brand positioning, expansion and growth of any company.

References

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