BRAND VALUATION
- Vinod Khurana

Intellectual Property and Intangible Assets continue to drive the world business and their importance is going to exponentially grow in time to come. Intellectual Property is an integral part of the business concept and is best understood and utilized with in that context. In very real sense I strongly believe, intellectual property can no more be considered as intangible but are tangible assets, conferring rights to owner of such property that are both de-jure and de facto. Many of the new generation corporations have invested billions of rupees not in land and machinery but in intellectual capital. At the same time value creation and its growth are the ultimate goal of a management team; therefore the management performance can only be measured through the valuation of intellectual property at regular intervals, which becomes imperative. In the recent past valuation of intangible assets related to intellectual property has gained a considerable importance. Valuation of individual intangible assets is a recent concept in India, though the generic intangible assets better known, as Goodwill has been valued for a very long time. Goodwill is an umbrella concept. The Goodwill was valued when ever a business as a whole was transferred from one entity to another or when new partners were brought in or old partners left the business to give them their dues as part of their contribution to the business. Intellectual Property can be clearly distinguished from goodwill. UK & Australian Generally Accepted Accounting Principles (GAAP) has specified goodwill as an umbrella concept consisting of unidentifiable intangible assets and should not include those Intellectual Properties which are capable of individual identification and can be sold separately.

Today intellectual property age is on us, although the new paradigm is yet to be played fully, however the trends are clear. Just as the idle floor of the corporate building is leased to others, Intellectual Property is also being exploited in the same fashion. Idle assets are no good business you must use it or rent it and if you don’t need it for longer or for ever then lease it or sell it. The recent concept of valuation of intangible assets related to Intellectual Property like Patents, Copy rights, Design, Trademarks, Brands etc, is also getting greater importance as these Intellectual Properties of the business is now often sold and purchased in the market by itself, like any other tangible asset.

Intellectual Property is often used as stand alone tangible assets, whereas they could be at the same time more useful in large networking. McDonald’s for instance developed its own software for its cash register and order-tracking and other systems. In 2001 the company launched e-mac digital to sell software and services to the global restaurant industry. However the commercialization of Intellectual Property often involves non-core activities and is rarely anyone’s top priority, they will often die without commercialization if not supported at the highest level, therefore one must understand that the un-commercialized intellectual property is a wasted corporate asset, which otherwise could serve as spark plug to give robust start and boost the value of other tangible assets. All large companies possess enough intellectual property to bring some of it to market and could generate large operating incomes from Licensing and franchising. Companies need to change the way they manage their intellectual properties. Companies need to outsource and look outside to find the experts who can identify market application for Intellectual assets and convert these ideas into revenue.

Corporate assets:

Every business has to have land, building, plant and machinery etc. Capital investment often need longer share of investment; however it varies from business to business. A technology driven business is likely to have lesser investment in fixed capital. Functional strategies would also influence its pattern of investment. New generation business is less dominated by fixed assets and more influenced by Intellectual Capital and can broadly be divided as follows:
Intellectual Property: Brand

The word Brand is derived from the word burn and it was by this method that in early period, man marked his live stock, from branding the live stock he moved on to branding his goods and his work. Brand Equity in short can be defined as the added value provided to a product or a company by its brand name

Creating a power brand involves blending of resources in a unique way and how effectively they have been blended is revealed only through valuation. Brand building has much higher rate of return than most other investments made by the entrepreneur, major part of profit does not accrue from manufacturing but from branding. The resources spent on brand building are not consumed and have a lagging effect, which ultimately turns out in formidable asset formation, over a period of time. Building of brands takes years; most of the famous brands are even 100 years old. Corporate branding is different from Product branding at corporate, and they can be described as Brand House and House of Brand. A Corporate brand can be used in conjunction with product brand.

Many of us think a brand being synonymous with trademark, where as it is not so. Brand is not only trademark, trademark is used to identify the source of a product and distinguish it from others, whereas brand is a promise of quality and authenticity that the customer can rely on, infact brands are contrasting with commodities for example Colgate, Dettol and Nirma, though I personally feel that Nirma in the recent past, as a brand has been diluted by its expansion in unrelated field, not going in detail at this stage, it would suffice to say, when the brand identity lacks consensus and clarity, its full potential are unlikely to be realized. Several brands could be offered under a family trademark and they could provide and create synergy, clarity and leverage to each other but they need to be blended properly.

The accounting standards Committee (ASC) recognized that a trademark was just a subset of the far broader concept of a brand. In exposure draft 52 the term brand was generally used with a meaning significantly different from and wider than a Trademark. Brand is much more than a Trademark or a Logo. It is a promise of quality and authenticity that the customer can rely on.

The purpose of Brand is:
• To uniquely identify a company and its product.
• To differentiate them from competitor.
• To enhance the perceived value, the quality and satisfaction that a customer experiences.
• To evoke distinct associate stands for certain personality traits and carries emotional
attachment.
• Above all brand is supposed to inspire trust. Trust failure can lead to brand failure and brand failure can be fatal.

There are various categories of trademark and there are various types of Brands

Trademarks are categorized as:
1. Fanciful marks: These Marks have a built in meaning e.g. Kodak
2. Arbitrary marks: These Marks are existing words with no relation to Goods/
Services e.g. Apple computer
3. Suggestive marks: These Marks suggest some attribute or benefit from the goods
e.g. Neem Soap
4. Descriptive marks: These Marks often cannot be protected unless they have achieved
distinctiveness. Kerosene and Elevator were good brands at one
time but they lost their identities on being descriptive

Type of Brands

Brand is the most precious asset as regards to longevity and creates major barriers for the competitor. Philips Morris, Unilever, Procter & Gamble, Coca-Cola are among many others core brand groups. Some Major Corporate houses with strong brands such as Coca-Cola accounts between 90-96% of the total corporate assets value from brands. Brands are the ultimate accountable institution. If people fall out of the corporate or product brand the corporate or the products go out of business.

The Brand can be one of the four forms, they are:
1. Brands which are associated with the product and no association with the
manufacturers name e.g. Lux ( generally the products of Unilever and
P & G fall in this category)
2. Brands where the Manufacturers name is attributed to a product e.g. Tata
Indica. (Generally the products of Tata Group fall in this category)
3. Brands where the company and product name is blended e.g. Coca –Cola
4. Brands that are personalized e.g. St. Michel, Spencer

The modus operandi of the valuation would vary in each case as they are strongly influenced by existing environments. The environments broadly are internal & external environment and the major variables are internal strength, marketing scenario, consumer perception, technical know-how and its changing speed, growth prospective, competition scenario, government policy, impact of globalization among others. To valuate a brand and other intellectual properties the valuator requires careful analysis, keen judgment, through professional knowledge and a team of members who have expertise in finance, marketing, technical know-how, and in legal fields. There are forty odd variables, which in generic term are called environments that affect the value of the brand.

What we need to understand is that the value of the brands need to be maintained continuously and is not some thing that is consistent or permanent; they do change with the changing environments. Certain events can devalue an Intellectual Property asset in the same way a fire can suddenly destroy a piece of real property. What matters in business is to maximize the economic wealth, therefore if the establishment cannot maintain brand or the importance of the brand has higher commercial value in the hands of other organization, one may just like to exchange hands or shake hands as it benefits both the parties and makes economic sense. In order to optimize the gains it becomes necessary to know the intrinsic value of brand from time to time.

In present scenario impact of WTO treaty and Globalization in general need critical evaluation to under stand its implication on the brand. The external variable i.e. Globalization & WTO impact has given a new dimension to the valuation process and its importance needs to be urgently understood and addressed for formulation of business strategy .The impact of all these variables would vary from sector to sector and on type of brand and hence would need different weightage for evaluating.

Before I come to method of valuation, we must understand; WHY DO WE NEED VALUATION? Valuation has various intangible and tangible benefits :

Intangible benefits are:
(a) Enhanced Confidence: Brand valuation shows the faith & confidence of public at large, in the product. The valuation also gives confidence to its employees who take great pride being associated with the company and motivates them for its further growth. Valuation if reflected in the books of accounts further enhances the public loyalty to the product and hence becomes a force multiplier.
(b) Indicator of effective utilization: The investment in the brand building creates value in the reverse direction when compared to the capital expenditure. When you invest in capital expenditure you utilize the proportionate cost every year, which we write off in the form of depreciation or amortization, where as the expenditure in brand building is incurred today and this expenditure is converted into valuable asset over a period of time. The expenditure is considered as revenue expense due to accounting & taxation provision which really is not so, hence valuation gives you the real effective worth, which you have created over the years through brand building.
(c) Credibility to the real worth: If you valuate your brand only at the time of disposal, it has a much lesser influence and will always leave a doubt of its real worth, in the minds of both the buyer as well as the seller where as if the brand is continuously valued at regular intervals it has a different impact and gives much more creditability to the real worth. As I understand when Thums-up and Limca brands were sold away to coca-cola as corporate strategy, these brands were never valued before and were paid whatever was asked for without knowing its intrinsic value.
(d) Strategy development: Companies are applying brand evaluation techniques in order to understand and manage their brands better, valuation process, which goes through due diligence reveals strength and weaknesses of the company’s brand, it thus provides an excellent tool for strategy development. .

Tangible Benefits:

a) Can help in Capitalization: A Balance Sheet which incorporates a brand value provides a more realistic picture and goodwill arising from an acquisition can be reduced as goodwill invariable needs to be amortized where as the brand value can stay in the Balance Sheet giving more realistic presentation of capitalization
b) Merger & Acquisition: It is of critical importance for an acquirer, as well as for the vender to understand and evaluate their real worth for negotiating the correct price. As the valuation report does not only indicates value, the report also shows as to how the value has been worked out elaborating all assumptions, which provides the real insight and would be of great value to the acquirer.
c) Disposal: The current focus on brands has led many companies to recognize that they cannot support properly all their brands or certain brands could be worth more to a third party than to their current owner. Brand valuation technique can be used to judge which brand to dispose of and their possible economic worth to a third party.
d) Licensing: Brand licensing, either to third -parties or internally to its own subsidiary, is an increasingly common practice, brand valuation assists in formulating this strategy and helps in charging royalty rates.
e) Fund Raising: Brand value is playing an increasing prominent role in the area of fund raising particularly from the public, as brand represent robust asset against which to seek cheaper funds is much easier.
f) Discount Rate: Robust strength of brand also assists in arranging the large funds at lower cost from financial institutes.
g) Damages Recovery for Infringements: How can the company claim appropriate damages if the company does not know the value of its brand that is being infringed. Independent valuation report would definitely be accepted more favorably by the judiciary for levy of damages.
h) For taxation purpose: Taxation department desires that all such transfers must be executed at Arm’s length transaction. Valuation certification from an independent establishment of repute is the best way to establish that the value of transaction as reflected is a true value.
i) Dissolution: Valuation at the time of dissolution becomes essential for speedy transfer of intellectual capital.
j) Collateral based financing: if the intellectual property is used as collateral security it could only be possible if they are valued.

If the corporate does not know the value of its Intellectual Property, how can the organization monitor its growth and protection? In view of its advantages, it becomes imperative for any business organization to know the value of its Intellectual Property from time to time to formulate a business strategy. The corporations may not be in a position to provide precise accounting of their Intellectual Property Assets, but to start with at a minimum, company must identify and index its IP assets, outline a strategy to exploit the value of assets and then begin the process of assigning value to each asset. If you do not know the value you also loose the ability to commercialize it fully, not only that you may not be able to protect and recover the correct damages in case of infringement and dilution litigation. Its just like a diamond, without the knowledge of its real value, it may just be treated as an ordinary stone.

VALUATION PRINCIPLES

Brand valuation should be the centered theme for any brand management where the idea is to manage the asset value of the brand. Before you go for valuation you need to go for due diligence, valuation of Intellectual Property & Intellectual Property due diligence is integrally related as legal issues identified during due diligence have significant effect on the value of Intellectual Property asset. Intellectual Property due diligence generally provides vital information specific to future benefits, economic life and ownership rights and the limitations of the assets all of which affects final value. Therefore due diligence is prerequisite to the valuation process, regardless of the methodology used.

Valuation of intellectual property that we often talk about is an appraisal and not the value per se, and shall not be construed as the price or cost that is associated with tangible goods. Valuation of Intellectual property cannot be accomplished in stand-alone basis, nor can it be based without realistic assumptions. Patent, Trade secret, Copyright could still be valued to certain extent in isolation but not the Brand, for example if we ask, is Rolex watch really the same as a Brand ‘X’ watch? When we refer and say “the same as “, we refer to performance, reliability, longevity, technology advancement and the like, besides brand some thing else also is embedded in the product in order to sustain this demand of leadership, if it is so then we can not ascribe all of the premium price attributable to the Brand.

To assess the brand value it is not just the exercise of crunching financial numbers, it is derived from what the consumer have to say what the brand is worth. Due diligence as said earlier, is part of a full fledged brand valuation exercise, which can also help a company strengthen it’s inter departmental communication and also develop a reliable information system. The exercise will indicate the strengths and weaknesses of the companies brand and will be useful tool in designing brand management strategy. This can help to differentiate between strong brands and brands which are only glamorous and not that strong and would assist brand and marketing manager in carrying out comprehensive health check for the brand.

DUE- DILIGENCE

The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all legal and financial professionals and IP owner to have thorough understanding of the assessment and the valuation of these assets, and their role in commercial transaction. A detailed assessment of intellectual property asset is becoming an increasingly integrated part of commercial transaction. Acquiring or investing in a business that own IP assets require expanding the scope and depth of due diligence. IP due –diligence can also facilitate a company‘s thorough internal assessment of its own assets, self-audit can help and enhance Intellectual Property planning and management.

Due diligence is the process of investigating a party’s ownership, right to use, and right to stop others from using the IP rights involved in sale or merger ---the nature of transaction and the rights being acquired will determine the extent and focus of the due diligence review.

Due-diligence should reveal

• Who owns the rights?
• Are the rights valid and transferable and enforceable?
• Are there any agreement or restriction that prevent the party for granting rights to other?
• Is the property registered in the proper office?
• Any shortcoming or default on payment?
• Any past or potential litigation?
• Has the property being misused in the past rendering right unenforceable?
• Any encumbrances?

Preparing for intellectual property due diligence requires substantial planning by both the buyer and target company. Before the due diligence commences, counsel of both the parties must consider important legal issues related to conducting the due diligence such as confidentiality obligation of the target company towards third party administrative matters pertaining to the organisation and execution of the due diligence should also be arranged between the parties.

Legal basis for due diligence-often starts in the form of letter of intent or memorandum of understanding and commonly regulates the due diligence process. Confidentiality agreement between buyer and Target Company is one of the necessity and both should ensure that it is carefully drafted and shall include the scheduling, modus operandi and deadlines, with due emphasis on Attorney-Client privilege

Buyer’s perception: Buyers preparation of the intellectual property due diligence is critical. Careful preparation for the due diligence will affect whether or not buyer makes a correct decision to proceed. Buyer often has negotiating leverage over Target Company. Buyer should understand in advance what question it wishes the due diligence to answer, only then it can be determined where to focus during due diligence. Buyer should first define its goal in the transaction; the rest thing would be augmented accordingly. Focus of due diligence should invariably be to answer the truth.

The scope of Intellectual property due diligence will be determined by a number of factors such as parties goal in the transaction such as capital contribution, assets transfer, security of loan, or internal assessment of its own and will be influenced by budgeting, available human resources, the size and complexity of target company and its intellectual property portfolio among other such issues.
Buyer having done the preliminary due diligence with respect to current status of Intellectual Property portfolio should evaluate the portfolio with respect to function strategy to work out:

• Ownership strategy.
• Protection strategy.
• Exploitation strategy.
• Enforcement strategy.

Target Company’s perception: In preparing for due diligence, target company must determine its overall scope and focus with a clear understanding of the buyer’s goal in the transaction, which shall be placed on records. Target company should make a preliminary assessment of the current status of its intellectual property portfolio and management including:
• Current holding and their status.
• Goals for the portfolio.
• Historical and prospective investment in Intellectual Property acquisition, protection and exploitation.
This would also help the target company to define its perspective. If the due diligence were being conducted for internal purpose the goal would be quite different than the due diligence for external reason. If the Buyer and the Target Company have conflicting goal over the purpose and scope of the transaction, the transaction may fail if it is so it is preferable for the failure to occur prior to commencing the due diligence to avoid disclosure.

The importance of due diligence can be understood from the instance in which Volkswagen recently acquired Rolls Royse Motors, on acquiring they came to know the company does not own the trademark and the trademark pertains to Rolls Royse Aero engine. The consequences can be well appreciated. The areas of examination would vary from each intellectual property for instance;

ISSUES THAT NEED EXAMINATION WITH RESPECT TO TRADE AND SERVICE MARKS

• Definition of Rights
• Registered marks
• Pending applications
• Trademarks exploited by Target Company but not subject of registration
• Ownership
• Marks created by Target Company employees
• Marks created by independent contractors
• Marks assigned to Target Company by third parties
• Liens and other mortgages
• Third Party Rights
• Concurrent use and consent agreements
• Licenses from third parties
• Freedom to use
• Protection/Registration
• Status and scope of registered marks
• Status and scope of pending applications
• Non-registered marks (marketing/registrability)
• Proper use of markings
• Exploitation
• Inventory of products/services on or in connection with which marks are used
• Licensing practices- general/misuse
• Inter-company licensing practices
• Internet use/licensing
• Nonuse
• Enforcement/Disputes
• Target Company threatened, pending actions against third parties
• Third party threatened, pending actions against Target Company
• Summary, Conclusions, General Comments
• Examine and evaluate opinion letter and cease and desist letters.

Due Diligence for valuation would help in building strategy, where in:

• If Intellectual Property asset is underplayed the plans for maximization would be discussed.
• If the Trademark has been maximized to the point that it has lost its cachet in the market place, reclaiming may be considered.
• If mark is undergoing generalization and is becoming generic, reclaiming the mark from slipping to generic status would need to be considered.
• Certain events can devalue an Intellectual Property Asset, in the same way a fire can suddenly destroy a piece of real property. These sudden events in respect of IP could be adverse publicity or personal injury arising from a product. An essential part of the due diligence and valuation process accounts for the impact of product and company-related events on assets - management can use risk information revealed in the due diligence.
• Due diligence could highlight contingent risk which do not always arise from Intellectual Property law itself but may be significantly affected by product liability and contract law and other non Intellectual Property realms.

Therefore Intellectual Property due diligence and valuation can be correlated with the overall legal due diligence to provide an accurate conclusion regarding the asset present and future value.

Brand Valuation:

How does one go about valuing the Intellectual Property?

The choice of approach will be determined primarily by the type of Intellectual Property asset is to be valued, the circumstances of the specific transaction, the availability of information and the level of due diligence that the corporate is willing to take on. When multiple approaches are applied a comparison and reconciliation of resulting value is possible. There are four principle approaches, which are often used for valuation of Intellectual Property they are:

a) Cost approach
b) Market approach
c) Income approach
d) Other approach

Cost Approach

It is important to remember that cost does not equal value. Cost approach does not directly consider the amount of economic benefit that is attached to the intellectual property. It is inherent assumption with this approach that the economic benefit indeed exist and are justified enough to develop the intellectual property. Therefore the cost incurred to develop the intellectual property is summed up proportionately over the period of time directly related to intellectual property.

The general principle governing the cost approach is the principle of substitute, which states that one would not pay more for the property than its cost to create it. The cost approach is very useful as valuation method for Intellectual Property such as Computer software, R& D programme. Such approach is often found in Govt. department e. g. Say the cost of development of Light Combat Aircraft (LCA) by HAL will be directly debited to the Air Force, if the Aircraft is developed on the specific need of the IAF. Similarly the innovation developed by the Govt. Research Establishments is charged to the users on cost basis. It is often used when other valuation method are not applicable. We must understand that the cost is not the same as value; so the starting point in using cost approach in IP is to obtain the estimate of the cost to produce a new replica of Intellectual Property, therefore the approach is not very relevant to brand valuation, however this would certainly help in evaluating as to how well the resources spent on brand building have been blended when its market value is determined by other methods.

Historical cost: That is the proportionate of Historical Cost (in the form of depreciation) on the basis of original cost. Brand Value based on historical cost is the aggregate cost of proportionate historical cost of fixed asset consumed and all marketing, advertising and R& D expenditure incurred over a period of time on a brand.

Replacement cost: The cost based on replacement cost for the utilization of proportionate fixed assets could be quite subjective

Fair market value: The cost can also be based on proportionate of fair market value of the fixed cost consumed.

In other words the Historical cost, Replacement cost or Fair market value is only relevant for charging proportionate of fixed assets used for the development of new intellectual property, these factors are not relevant when it is applied to direct cost element. Direct cost is always based on actual expenditure like the cost incurred for the payment of salary and wages.

Market Approach:

The market approach provides an indication of value by comparing the price at which similar intellectual property has been exchanged between willing buyer and seller. There are various elements of comparison, which should be given due importance while analyzing and comparing the transactions such as, functional characteristics of intellectual property, physical characteristics of intellectual property, the size of industry in which the intellectual property is transferred, the economic condition, the existence of any special term and the legal rights that have been transferred. In brand transfer such approach is not readily suited as it is not the sale of tangible assets being undertaken through the market dealer and also the two brands cannot be the same, which can be easily compared, and there is significant difference in the manner in which the brand asset is exploited.

The second method of market approach is the market valuation through capital market. Say hypothetically that a company is operating in commercial vehicle and has the consistent market capitalization at Rs. 500 Crores. It has purchased a new brand which has been successfully put into use, and this new brand has given an increase in market capitalization to Rs. 600 Crores. We can with reservation say that the new brand is worth Rs. 100 Crores but one has to understand the various other influencing factors in the real market scenario. Therefore the market approach is not without the limitation and often not used.

The other method of market approach is valued by comparison with the sale value of similar assets. A multiplier can be determined based on sale or EBITDA on which a comparison could be made and then the multiplier can be used as guidelines for determining the brand value. This method is more reliable in market approach.

Income Approach:

The value of brand can be expressed as the present value of the future stream of economic benefits that can be derived from its commercialization. There are numbers of factors, which are fundamental to this approach, which are:
• What amount of economic benefit can be expected?
• How long can it be expected to continue?
• What are the costs directly associated with the return?
• What risk is involved with achieving the anticipated benefits?
• What is the discount rate applicable to such investments?

The most vital factor in determining the value of a brand is its profitability or potential profitability over period of time. The profit must be fully absorbed profit of the brand. Tax deduction and financial cost is matter of perception. Some establishments in the field of valuation don’t but I strongly feel that financial cost must be charged. Where as tax is a matter of various positional factors, hence should not affect the brand value.

Brand’s Strength can be summarized as:

• Leadership: A brand that leads its market.
• Stability& Longevity: Long established brands, which command consumer loyalty
• Market: Brands in market such as food, drinks and other consumer
goods intrinsically are more valuable than other market
• Internationality: Geographical extent (Nike is registered TM over 100 countries)
• Support: Those brand which have received consistent investments
and support.
• Channel of trade: Mode of marketing
• Protection: The strength and breadth of the brand’s protection is critical in
assessment of its worth. A registered trademark is a statutory
monopoly
I would not go in elaborations of each step but each step is evaluated in different segment and consequences of each step needs to be well understood. In sum the analysis of the above factors helps in knowing:

The Components of Brand Value:

The overall assessment of "brand power” is an aggregation of the following components:

Brand Weight (Dominance): Brand weight is a measure of the brand's dominance within its category or market. Those with the greatest weight are likely to be market leaders with significant market shares.
Brand Length (Stretch): Brand length refers to the ability to migrate the brand successfully into new markets.
Brand Breadth (Scope): Brand breadth refers to the scope of the brand in terms of consumers (age groups, gender groups, economic groups) and geographic spread (international, cultural). Brands that are high in breadth are likely to have a lower risk profile.
Brand Depth (Loyalty): Finally, brand depth reflects the commitment of loyal consumers to the brand. Depth is based on the development of strong relationships to the brand's consumer base.

Core Factors Influencing Valuation

1. Potential brand profit and its growth pattern
2. Brand/ Product life cycle
3. Cost requirements to maintain the brand
4. Discount rate .

Valuation of brand is directly proportionate to its impact on the brand profit its product sale and its growth pattern. If the sale forecasts are large and the growth rate is substantial the valuation is also going to be directly proportionate to it. This element needs detailed analysis as future projection and forecast is difficult task and the deeper you go difficult it becomes. Uncertainty is the hardest part of valuing brand and use of probability-weighted scenario is the way to deal with it. Monte Carlo simulation is one of the method to handle such issues. Future projection can be divided into two categories they are:

• Where future is largely an extension of the past
• Where there are one or more discontinuities in the environment

Where future is largely an extension: future projection in this category is comparatively simpler. Various statistical and econometric models are applied for projection, not going into the detailed few of the methods are: -

(i) Statistical Projection:
• Trend analysis.
• Regression analysis

(ii) Econometric Model:

• Input and output method is most common in this model.

(iii) Marketing and Marketing Research Method
• Analysis of estimates obtained
• Leading indicator
• Marketing judgment

Where there are one or more discontinuities:

Future projection in this category needs much deeper analysis and is complex. More the discontinuities in the variables more complex it becomes. Not going into detail explanation of techniques, the techniques, which are generally applied, are:

• Delphi Technique
• Scenario Technique
• Impact analysis technique

All these techniques are different and have different application and do provide the general approximation to the future projections.

Life Cycle

Expected life is constrained by legal as well as economic factors. Functional technical and economic obsolescence truncated by invalidation or infringement proceeding can affect statutory life. Assessing the life of trademark can be complex. TM also has a distinct statutory term; in some jurisdiction protection ceases if owner fails to file renewals. Its enforceable life may be inadvertently shortened by certain events such as grant of "Naked licensing" the use of the altered version of the mark or the failure to register in a particular territory would result in effective termination in other territories if worldwide exploitation is required). Similarly licensed Trademark requires both a calculation of the statuary term and a calculation of the life of the license. This necessitates a legal analysis of the contract to determine whether events may trigger modification, termination or extrusion of the agreement. Life cycle of brand or the product in which the brand is integrated has various stages, which directly influence the valuation; life cycle can be broadly divided in the following stages:

• Embryonic
• Growing
• Maturity
• Decline

Embryonic Stage: Is the first stage where the brand or product has been put into commercial use. It needs a large infrastructure and capital cost and would take a long time to be profitable.
Growing Stage: At this stage the brand /product has been established in the market and its commercial valuation is easily estimated as compared to embryonic stage as the growth pattern is established and understood.
Maturity Stage: At this stage the brand/product has completed its growth and is stagnant and starts facing competition due to lack of growth and well established capacity turning to be surplus.
Decline: At this stage the new brand/products are introduced and the demand of existing brand/products starts declining gradually and with the passage of time declines rapidly unless they remain market leader.

Therefore the life cycle is an important element in valuating the brand/product.
Investment Requirement for commercialization of Brand

The value of brand is directly proportionate to the investment required to put the product to commercialization under the brand. If a new developed brand/product needs larger investments for establishing as compared to the other brand, which needs lesser investments, and other factors being same, the value of brand which needs higher investment is obviously going to be less as compared to the one that needs lesser investments.

If the new product can be dovetailed in the existing brand line, investment requirement for such commercialization are nominal and hence the value of brand is likely to be high depending upon its commercial benefits and cost saving.

Profit Margin: Profit margin is part of final outcome of all the above factors and the other part being a turn over. If profit margin by commercialization of brand is large and at the same time turnover or cost saving element is large the value of brand would be large too, therefore the value of brand is directly proportionate to its implication on profit margin and product turnover and its growth.

Now coming back to income approach the first three fundamental factors have been covered directly or indirectly in one form or the other in the factors mentioned above. However the discount rate applicability and risk involved with the projection needs to be understood.

Discount Rate:

Discount Rate is the measure of the compensation of the investor for the commitment of capital and is based on the concept of "Time value of money". Time value of money is a sound concept simply means that money does not remain idle, no matter when it is received it continues to earn at the appropriate rate of return. Thus if one rupee is received today it will be 1.10 rupee at the end of year, if the discount rate i.e. rate of return is 10 per cent per annum. So rupee one today is worth more than rupee one after over year. Capital commitment causes the investor to give up other investment opportunity+ assured risk. Discount rate is used to translate the future economic benefits into present value and consist of the following segments. Due diligence can provide important information that would impact the quantification of risk in the capitalization rate including predicting the likelihood that a particular intellectual property asset will be subject to infringement prosecution or defense action and predicting the possible outcome of such action.
Discount Rate=loss of Liquidity+ cover for inflation+ real interest rate+ relative risk cover

Discounted cash flow method directly incorporates in a single index the present value from given future value of different time. Therefore both the investments and the returns taking place at different point in time are worked out at one single index to know its present value or net present value.

Present value = Annual Brand Profit (1+g) = 1000(1+.06) = Rs. 26500
i- g .1-.06
Where i is required rate of return and g is the constant growth rate

Risk Involved:

The path from Trademark to Brand building is tenuous. In working out the valuation, various consideration are assumed as regards to economic benefits, how long are they expected to continue, the investments required to commercialize and maintain the brand etc., as discussed in factors influencing the value, therefore the risk analysis needs to be kept in mind while working out the brand valuation.

In actual life cycle these variables are all uncertain as they are estimated, these estimates are called situations of risk. To work out the element of risk we evaluate the probability distributions of the uncertain data like expected annual economic benefits keeping the probability in view we work out the mean expected economic benefits i.e. the mean cash flow of the expected period on having found the mean expected cash flow we calculate the standard deviation about the mean cash flow for the expected period.

The method of working out the present value or mean NPV and Standard Deviation about the mean NPV is different in different scenarios, which are:
• Serially independent cash flows;
• Perfectly correlated cash flows;
• Moderately correlated cash flow.

The expected NPV and standard deviation give a good measure about the degree of risk of the valuation. Co-efficient of variation is relevant as a measure of relative risk. The risk-averse organization will select a proposal with the lowest co-efficient of variation. When there is no comparison and we have to evaluate only one proposal, we can find the strength with the help of standard deviation the probability of getting at least a specified NPV through the normal distribution proposition.
Slide: Due Diligence

Valuation: Valuation profile is shown in the following table. The valuation table is explained point wise as follows.
Slide: Brand Valuation

Valuation Based on Premium Pricing:

It is a simple process in which the valuation is based on the price difference level between branded and generic product, which is multiplied by the sale volume. It has various limitations as the higher price is not entirely due to brand name but can be used as thumb rule with due diligence.

Royalty Saving Method:

This method is used to determine the rate of royalty. The principle lies in the fact that the amount of royalty that the business had to pay if they had not owned the brand, over a period of time when discounted to present value is the brand value.

Other approaches

Price earning approach, known as P/E approach or multiple approaches: Multiple is to be applied to brand profit. Multiple is derived from in depth assessment of the brand strength, which determines the reliability of brands future cash flow. The brand strength is a composite weighted value of the factors as mentioned earlier which influence the brand. Multiple is applied to the brands post tax profit. Multiple would vary from Business to Business and industry to industry. P/E ratios can be reasonably considered with due diligence multiple factor to apply to brand for valuation.

P/E = 1-g/r
k-g
g= growth rate =5%
r=rate of return =20%
k=discount rate =10%
P/E = 1-5%/20%
10%-5%

P/E =15

So if the annual earning of Brand is say ‘X’ amount, the Brand value is 15 ‘X’

Eliminating Approach
We know

Business Enterprise=invested capital value=Long term Debt+ Shareholder equity

Business Enterprise=Market Capitalization
Market Capitalization =Fix Assets+ Working Capital + Intellectual Property

Intellectual Capital= Patent+ Technology+ Know-how +Trademark
(So if we know the value of Other Intellectual Properties by
eliminating method we can find the value of Trademark)

Valuation report

The overview of the Brand Valuation report should confirm the purpose for which the analysis was conducted, and the ultimate use for which the conclusion is appropriate. The report shall also elaborate expectations through business plan that have been kept in mind. Expectations at the time of the valuation represent key information. Formal valuation report should summarize the key issues considered in reaching conclusion and provide an explanation of the procedure used.

Commercialization of Intellectual Property

The value of intellectual property lies in its commercialization and not in its mere creation and development per se. Competitive advantage arises out of the way in which Corporate organizes and performs activities and the activities are the means by which a firm creates value in its product for its buyers. The value and the value addition for the buyer is the end product for any organisation. There is no denying that the role of intellectual Property for creating and enhancing the value addition for the buyer, has never been as critical as today, in this new global world. The importance of Intellectual property is exponentially growing, as industries are spending huge sum in their creation and development. The growth can be enhanced if the banks and financial institutions provide leverage for its commercialization. This would need a change in mindset and if put in to practice, would create win-win situation for the financial institutions and the industry both.

The leverage that I am talking about is the availability of funds by the banks and Financial Institution to the industry, against the mortgage of Intellectual Property. If we examine the Capitalization of any industry, they all will have large share of capitalization in intellectual property, so much so that the IT dominated and large establishments have as much as 80% of their capitalization in intellectual property. At the same time if we go into the stability of value analysis we find the value of Intellectual Property is more stable than the physical assets, more so in respect of trademark, in most of the cases. The banking institutions in Japan are still undergoing crisis due to collapse of the market value of physical assets, where the lending against the physical asset as collateral security collapsed.

If the Financial Institution and Banks understand the value of Intellectual Property and accept them as collateral security, the scenario can change with respect to their securities. The Patent Act 2002 Section 68 and 69 provides the provision for mortgage and how that can be done, similarly section 21 of the Copyright Act 2000 permits the author to relinquish all or any right comprised in the copyright. However there is no mention in the Trademark Act for Securitization or mortgage and need to develop upon.

At the same time commercialization, particularly of trademark, is also strongly influenced by assignment and transmission which in turn are influenced by large amount of stamp duty paid for conveyance deed on the actual consideration required to be attached with the application sent to registrar of the Trademark for assignment and transmission. Why the stamp duty is being paid for and why the conveyance deed in terms of Registration Act 1908 is to be gone through. There is also a practice of getting the conveyance deed registered in the office of Sub Registrar of the deed, thought not mentioned in the trademark act, needs deliberation. The Finance bill 2000 in United Kingdom explicitly provides the stoppage of stamp duty on assignment and transmission of trademark and in U.S.A., Japan among many other countries, there is no provision or practice of payment of Stamp duty. In the United Kingdom there is well established practice and intellectual property laws permits the mortgage of corporate Intellectual Property as collateral security including the trademark and needs to be registered at the respective registrars offices registration is also being done at companies registrar offices as a precaution. In the U.S.A. Trademark is Federal as well as State subject therefore the statute has not talked about the mortgage of trademark and has left to the state governments, however the practices of mortgage is quite prevalent.

As we have moved away from the original principal that Trademark may be sold but not separately from the business in which it is used, so why not permit mortgage explicitly. There are many other related issues which need brainstorming session such as taxation on capital gains on sale and why should it not be exempted on purchase of intellectual property particularly falling in the same group of intellectual property. It is often said that if you owe Rupees One million to bank you are in trouble, but if you owe Rupees Ten billion the bank is in trouble. It may not be so if the banks have mortgaged your brand and other Intellectual Property.

Conclusion:

Intangible assets have a significant role in defining the growth of companies’ asset, Intellectual Property can become the reason for success and failure of any business, therefore understanding and valuating the Intellectual Property is critical for its development, protection and growth. The valuation of Intellectual Property particularly of Brand will also provide real insight of marketing and business management to formulate Strength, Weaknesses, Opportunities and Threat Analysis.

INTELLECTUAL PROPERTY –DUE DILIGENCE,

Business has got into state of merry go round, if you loosen the grip you are bound to fall .The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all legal and financial professionals and IP owner to have through understanding of the assessment and the valuation of these assets, and their role in commercial transaction. A detailed assessment of intellectual property asset is becoming an increasingly integrated part of commercial transaction. Acquiring or investing in a business that own IP assets require expanding the scope and depth of due diligence. Intellectual Property due diligence can also facilitate a company‘s thorough internal assessment of its own assets; self-audit can help and enhance intellectual property planning and management. Volkswagen recently acquired Rolls Royse on acquiring they came to know the company does not own the trademark.

Due diligence is the process of investigating a party’s ownership, right to use, and right to stop others from using the IP rights involved in sale or merger ---the nature of transaction and the rights being acquired will determine the extent and focus of the due diligence review.

WHAT DO WE EXPECT FROM DUE DILIGENCE

DUE-DILIGENCE SHOULD REVEAL

(a) Who owns the rights?
(b) Are the rights valid and transferable and enforceable?
(c) Are there any agreement or restriction that prevent the party for granting rights to other?
(d) Is the property registered in the proper office?
(e) Any shortcoming or default on payment.
(f) Any past or potential litigation.
(g) Has the property being misused in the past rendering right unenforceable.
(h) Any encumbrances.

ISSUES—PREPARING FOR DUE DILIGENCE
1. Scope of the intellectual property due diligence.

(A) Buyer’s goal, motivation, and alternatives in the transaction.
(B) Target company’s goal, motivation and alternatives

2. Target company’s capacity to respond to due diligence.

3.Buyers due diligence budget.
(a) Buyers due diligence team members
(b) Communication between counsel and parties to the transaction
(c) Confidentiality agreement between buyers and target company
(d) Letter of intent
(e) Deadline and scheduling
(f) Production and control of documents

4.Understanding of technological and creative intellectual property assets

5. Functional strategy.
(a) Ownership strategy.
(b) Protection strategy.
(c) Exploitation strategy.
(d) Enforcement strategy.

6. Internet and e-commerce considerations

Steps for the attorney: Attorney must understand the nature of transaction, client’s objective, objective consideration, client budget, client goal, and types of relevant document required, be clear, take opinion.

Issue that need examination in respect to patent.

Patent portfolio: -
(a) Non provisional patent
(b) Provisional patent applications.
(c) Administrative proceedings.( Search reports, Route of filing , Number of countries designated )
(d) Reissues, disclaimers and reexaminations
(e) Re-examination at the request of third party
(f) Certification of correctness and corrected applications.
(g) Abounded applications.
(h) Statutory registration
(i) Prosecution history: patent searches, validity opinion
(j) Information pertaining to patent exploitation: -Value or value addition.
(k) Whether the patent have been adequately protected: Investigation of all documents-maintenance fees, enforcement and failure to enforce
(l) Scope of patent (strength &breadth): - improvement and dependent patent