IP_Module_5

MODULE 5
INTELLECTUAL PROPERTY
VALUATION METHODOLOGIES AND CASE STUDIES

5.1 VALUATION OF INTELLECTUAL PROPERTY

Intellectual Property (IP) is one manifestation of an intangible asset. There are well-
established practices for valuing intangible assets although 'there is currently no Indian
accounting standard that comprehensively addresses the accounting treatment of intangible
assets. It has been noted that the valuation of intangible assets is 'complex and widely
misunderstood.’1 This material does not purport to educate the reader so that the reader can
undertake a valuation of IP. The learning for that task is well beyond the scope of this book.
If an enterprise has a need to value its IP or associated technology then an appropriate
professional appraiser should be engaged. Brands and trademarks are valuable intangible
assets2 which, when established and used, are capable of producing revenue in their own right
and which can be valued independently of other assets and of management and employees.
This material contains an overview of applicable brand valuation methodologies for
accounting [balance sheet] and other purposes3.

IP consists of a collection of legally protected rights such as Patents, Trademarks, Copyright,
Design, Trade Secrets etc. Each type of IP has different features and is applied to a different
type of intellectual creation of the mind. Intellectual Property has generally been understood
through patents as patents have been used by various businesses across the globe for
strengthening their competitive position, generating revenue and improving access to
financing.4

1 See W Lonergan, The Valuation of Businesses, Shares and other Equity, 3rd ed, Business and Professional
Publishing, 1998, p 257
2 In 1998, Sussanah Hart and John Murphy [Interbrand] edited a book titled, Brands – The New Wealth
Creators, because it was widely recognised that against the changing economic and financial background,
commercial entities need to broaden their understanding of “what the assets of business are”.
3 This methodology was developed by Interbrand in conjunction with Ranks Hovis McDougall and has since
been used by, among many others, Grand Metropolitan. United Biscuits, Nabisco, BSN and Lion Nathan. It has
been used in a host of applications besides the balance sheet including mergers and acquisitions, fund-raising,
brand strategy development and brand licensing. This methodology is by no means the only discourse available,
others are detailed towards the end of the material as annexures.
4 Shikegi Kamiyama & Jerry Shechan & Catalina Martinez, Valuation and Exploitation of Intellectual Property,
7 (STI Working Paper 2006/5, Statistical Analysis of Science, Technology & Industry) available at
http://www.oecd.org/dataoecd/62/52/37031481.pdf

1

IP Valuation is a process by which a business entity or any other person values the
intellectual property that he possesses. Just like tangible assets are given a value, IP valuation
helps in giving a value to the intangible asset. This value is required for multiple purposes.
The main reason is to enable an enterprise to efficiently engage an appraiser and be placed in
a position of knowledge when negotiating valuation issues with other commercial parties.
This module explains the fundamental principles of IP valuation (so that the reader can
readily understand the process and valuation report received from the appraiser). It also
discusses somes case studies of leading brands to help in better understanding the valuation
of brands.

There is a very basic dilemma facing the enterprise and its appraiser: does the target IP or
technology give the enterprise a benefit beyond the year in which investment in that IP or
technology was incurred? The valuation process endeavors to provide to the enterprise an
indication of the answer.

Unlike the valuation of residential real estate, valuation of IP has an uncertain reputation
because it involves the making of forecasts, the defining of something that cannot be seen and
relies upon estimates of the IP having an economic life. Nevertheless, it is now well
recognised that IP and other intangible assets play an increasingly important role in driving
income for businesses. Consequently shareholders, investors, lenders, employees and
advisers to enterprises are increasingly interested in the value of those assets.

The most common form of valuation of IP is an estimate of the appropriate royalty rate that
should be payable in consideration for the licensing of IP. This is a form of the income
approach and that approach is discussed in this material. The determination of royalty rates
and the factors that lead to that determination is a well-trodden area that deserves its own
discussion.

The discussion in this material will not extend to issues which may arise indirectly as a result
of valuation, such as inter-company transfers, bankruptcy or valuation for taxation purposes.

2

While enforcement of IP is a fundamental plank in its commercialisation, this material does
not canvass the methods or different factors considered by courts in determining damages and
account of profits arising from infringement of IP. The calculation of values is influenced by
the negotiating powers of the parties stemming from the strengths of their case and the risks
inherent in proceeding to trial.

5.2 REASONS FOR VALUATION

5.2.1 THE GROWING ROLE OF INTELLECTUAL PROPERTY IN THE WORLD TODAY

IP has mutated from being used as a defensive mechanism to being used as a strategic tool in
the world today. This evolution increased the importance of IP valuation.

5.2.2 IP AS A DEFENCE MECHANISM

Initially, firms used to patent a product to prevent other firms from copying their product or
patenting or blocking a technology that may be essential for competitors from entering the
market.5 Patenting was also done to prevent lawsuits.6 Patenting one’s own product
eliminated the chance of infringing someone else’s patent as the patent would only be granted
if the product was new and unrelated to existing patents. This ensured that a lawsuit could not
be filed by someone on the ground that its patent had been infringed and the firm that got its
product patented saved itself from payment of damages.

5.2.3 IP AS A STRATEGIC TOOL:

Over time, IP’s use by businesses evolved. From being used as mere defence mechanisms, IP
started being exploited in various ways such as

5 Ibid
6Ibid

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1. Securing superiority – For securing superiority, IP started being used in expansion of
alternative product designs and for carrying out enforcement against an infringer.7

2. In business and management strategies- As a part of business and management
strategy, IP started being used as a source of profits by securing the ideal IP portfolio
and by using IP actively in business assets such as licensing.8

3. Being used financial assets- IP also started being used for extracting external sources
of finance such as investing assets for financial institutions.9

As the use of IP evolved from securing superiority to being used in business and management
strategy, the importance of IP valuation gradually increased.10 With IP having the potential to
be used as a financial asset IP valuation has now become absolutely essential.11 Intellectual
Property now may be used in negotiations, to enhance reputation, generate license revenue
and to measure performance.12 Though IP is evolving it must be understood that these uses
are cumulative and not mutually exclusive.13

5.2.4 IP VALUATION AND ITS LINK TO INTELLECTUAL ASSET MANAGEMENT:

As importance of IP valuation has increased, the concept of Intellectual Asset Management14
has gained prominence as firms try to exploit more and more IP.15 IAM is a concept by which
the business value of the intellectual assets of a company is increased through comprehensive
valuation and management.16 Thus, IP valuation is closely interlinked with IAM.17

Firms use IAM to evaluate their IP portfolios. For example, a firm may use IAM to evaluate
its patent portfolio. IAM would include tasks such as identifying those patents which are not
needed for internal development of the firm but are viable enough to be licensed to other

7 Kamiyama & Shechan & Martinez, supra note 1 at 8
8 Ibid
9 Ibid
10 Ibid
11 Ibid
12 Kamiyama & Shechan & Martinez, supra note 1 at 7
13 Ibid
14 Hereinafter referred to as IAM
15 Kamiyama & Shechan & Martinez, supra note 1 at 8
16 Ibid
17 Ibid

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firms in a way that does not affect the profitability of the firm.18 It would also include
identifying patents which can be donated back to society as they cannot be licensed nor are
they required by the firm for internal development.19 Licensing out patents that aren’t needed
by the firm shall help increase licensing revenue for the firm while donating back
unnecessary patents shall generate cost savings and tax benefits.20 With the help of this
identification and analysis the firm ensures that all the patents that it has are properly utilized.
By employing patents as a part of the management strategy either the firm is using the patents
in its own processes, earning revenue from them through licenses or is saving its costs and
taxes. To put it simply, IAM helps in utilizing IP as an active part of business like any other
tangible asset.

The benefits of IAM can be tremendous and this is evident from what happened at Dow
Chemicals. Dow Chemicals employed IAM and its licensing revenue increased from 25
million US Dollars to 125 million US Dollars per year along with saving 50 million US
Dollars in intellectual property costs.21

Thus we see that the world is moving towards utilizing intellectual property as an integral
part of its business.

There is a wide range of reasons for valuation of IP. An enterprise may wish to value its IP or
technology to form a sensible foundation for determination of licensing royalties, obtain
financing, establish potential damages for IP infringement proceedings or assist decision
making of the enterprise. If a present value can be placed on the IP or the associated
technology then the enterprise may be in a better position to determine whether to place its
limited resources towards the development and commercialisation of that IP.

There may also be legal and accounting standards that require the proper valuation of the IP.
If IP is properly recorded as an asset, then it must be valued so that it can be reflected in the
financial statements of the enterprise. Changes introduced to the United States accounting
standards on 1 January 2002 (fast 141 and 142) mean that Indian subsidiaries of United States

18 Ibid
19 Ibid
20 Ibid
21 Kamiyama & Shechan & Martinez, supra note 1 at 9

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companies (or Indian companies that must lodge financial reports in the United States) must
test the value of their intangible assets every year. Similar trends may occur in India. The
introduction of new taxation laws relating to the consolidation of transactions within
corporate group structure may also be increasing the demand for valuation.

Typically the transfer of IP involves the transfer of an entire business or entity. It is rare for
the IP to be exchanged on its own other than through a licensing transaction. It usually
involves assessing the potential of a combination of tangible and intangible assets that give
the 'IP' its true value. This may be a patent and the know-how held by the researchers coupled
with working capital, the workforce of the enterprise or other intangible assets. This
complicates the valuation process because the other assets of the enterprise also need to be
valued or accounted for in the valuation process.

Of course, if none of the above applies the taxman is waiting around the corner. Transfer of
the IP may trigger capital gains tax or stamp duty liabilities where the value of the IP must be
declared.

Therefore IP valuation is necessary for the following purposes-

5.2.4.1 COMPANY VALUATION:

A company’s overall valuation includes valuation of both tangible assets such as plant,
machinery etc. and intangible assets such as IP. So IP is a fundamental component of a
company’s overall valuation.

If a company enters into a transaction such as buying, selling or transfer of assets in a
licensing arrangement or merges into another company or acquires a third company or
establishes a joint venture, then in each of such transactions IP valuation would be
necessary.22 An IP valuation helps the party to the transaction to know the value of the IP that
is being transacted and that shall help come to a correct estimate regarding the licensing fees

22 Pro INNO EUROPE, INNO ACTIONS, Student Handbook Valuation of Intellectual Property, available at
<http://www.ipcentar.uns.ac.rs/pdf/IP.pdf> (Last visited 19th May, 2012). Also see Paul Flignor & David
Orozco, Intangible Asset and Intellectual Property Valuation: A multidisciplinary perspective, available at
<http://www.wipo.int/sme/en/documents/ip_valuation.htm> (Last visited 19th May, 2012)

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or the amount that has to be paid for the merger, acquisition and joint venture.23 In other
words, an IP valuation shall help establish the price at which the company shall be willing to
enter into the proposed transaction.24

Company valuation is also necessary in a situation of bankruptcy or reorganization.
Assessment of company’s value at this stage shall again include valuation of IP assets.25 IP
valuation shall help the Bankruptcy court to properly dispose of the assets and reorganize the
company.26

If IP is not valued when a company valuation is necessary, then the company shall get a price
less than what it deserves in its transactions. So valuation of IP is extremely important.

5.2.4.2 TAXATION PLANNING AND COMPLIANCE:

If a particular legal entity is aware of the value of its IP, then calculating tax deductions and
complying with tax regulations becomes easier for it.27 For example, various US Tax Code
provisions require IP and intangible asset valuation for tax planning and compliance.28

These include areas such as charitable donations of IP, the sale or license of IP across tax
jurisdictions etc.29 If the IP is valued then compliance with these regulations shall become
easier.

5.2.4.3 FINANCIAL REPORTING AND ACCOUNTING:

23 Pro INNO EUROPE, INNO ACTIONS, Student Handbook Valuation of Intellectual Property, available at
<http://www.ipcentar.uns.ac.rs/pdf/IP.pdf> (Last visited 19th May, 2012)
24 Paul Flignor & David Orozco, Intangible Asset and Intellectual Property Valuation: A multidisciplinary
perspective, 2, available at <http://www.wipo.int/sme/en/documents/ip_valuation.htm> (Last visited 19th May,
2012)
25 Supra note 20
26 Flignor & Orozco, supra note 21 at 2
27 Supra note 20
28 Flignor & Orozco, supra note 21 at 3
29 Ibid

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IP Valuation is also necessary for accounting purposes and financial reporting such as
disclosing intangible assets on the public financial statements.30 This valuation is generally
done to comply with a regulation or guideline that is in place. For example the Financial
Accounting Standards Board of 2001 established guidelines regarding reporting of intangible
assets that were acquired through acquisitions.31 These regulations specified the valuation,
amortization and report of intangible assets.32 The report that had to be submitted had to
specify the value and the change in the value of subject assets.33

5.2.4.4 LITIGATION SUPPORT AND DISPUTE RESOLUTION:

IP Valuation is necessary in litigation and dispute resolution.34 In situations such as IP
infringement or breach of contract where damages need to be computed, IP valuation would
be of great use as it shall help in calculating the amount of damages that need to be awarded.

5.2.4.5 INTERNAL MANAGEMENT:

For a business to be successful, it needs to be managed properly. Management of business
includes management of its IP. If IP is properly managed and exploited then the chances that
the business shall do well is high. Various decisions regarding business management such as
that of research, development, legal and industrial protection application and
commercialization involve risk.35 If IP valuation takes place then these risks can be
understood, dealt with and cost effective decision making can be facilitated.36 All of this shall
help manage the business better internally and in making it successful.

5.2.4.6 HELPS IN FINANCING OF BUSINESS:

Intellectual Property can be used to raise finance. If IP is to be used as collateral for a bank
loan or if securitization is to take place on the basis of intellectual property or if venture

30 Flignor & Orozco, supra note 21 at 2
31 Ibid
32 Ibid
33 Ibid
34 Ibid
35 Supra note 20
36 Ibid

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capital financing is to take place, then the intellectual property that is being used for these
purposes needs to be properly valued.37 In absence of proper valuation of IP, none of these
transactions can take place. Each of these types of raising finance has been used before in
different parts of the world. Some examples of use of IP for raising finance are mentioned
below to indicate the potential of intellectual property in this area.

Ex 1: IP as Bank Collateral:

There have been instances where banks have taken intellectual property as collateral. For
example, in 1995, the Development Bank of Japan implemented a loan system that allowed
the use of patents, patent applications, copyrights of computer programmes and contents as
collateral.38 After the passing of this policy, the Bank granted more than 250 loans to venture
firms with the Bank assessing the present value of cash flows to be generated by the
intellectual property.39 The German Federal Financial Supervisory Authority has also
accepted patents as the sole security for bank lending.40

Ex 2: IP Backed Securitisation

This involves the transfer of intellectual property by the owner of IP for securitisation and the
receipt of capital receipts from investors in the form of lump sum payment.41 This type of
financing has been seen in the music industry and in pharmaceuticals.42 In 1997, musician
David Bowie securitized his future royalty streams from his 25 albums to raise 55 million US
dollars.43 Royalty Parma, in order to diversify its holdings and mitigate the risks associated
with diversification, securitized a set of 13 patents that it had.44

37 Supra note 20, Also see Paul Flignor & David Orozco, Intangible Asset and Intellectual Property Valuation:
A multidisciplinary perspective, 3, available at http://www.wipo.int/sme/en/documents/ip_valuation.htm (Last
visited 19th May, 2012)
38 Kamiyama & Shechan & Martinez, supra note 1 at 20
39 For further information on this programme, see www.dbj.go.jp/japanese/venture/venture_intellectual.html
(Japanese).
40 Kamiyama & Shechan & Martinez, supra note 1 at 20
41 Kamiyama & Shechan & Martinez, supra note 1 at 21
42 Ibid
43 In March 2004, the bond was downgraded from A3 to Baa3 due to the downturn in sales of recorded music.
See http://launch.yahoo.com/read/news/12174412.
44 Kamiyama & Shechan & Martinez, supra note 1 at 21

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Ex 3: Using IP for Venture Capital Financing:

Intellectual Property can also be used for venture capital financing. Owning a patent is
extremely significant as it indicates that a person has a novel and distinct invention which
shall enable it to distinguish his good from others in the market.45 Moreover, a patent can also
be used to exclude others from implementing their invention in the marketplace.46 Possession
of such an IP helps in venture capital financing as people willing to invest in any business
want security of their investment as well as a great probability of the investment to succeed.
If the person seeking investment has a patent then it gives him an edge attracting venture
capital.

5.3 VALUATION OF WHAT?

A critical element to valuation is a clear understanding of what is to be valued. When
addressing IP that may encompass the legal IP rights, reference is often made to the
technology in which the IP subsists or the business of the enterprise that relies upon the IP or
technology. Commonly the utility of the IP will be realised in some physical form or
application and its value will be closely associated with that embodiment. For this reason this
material will refer to valuation of the IP and the associated technology in the same context.
However, the appraiser will need to consider whether there are other forms of 'assets' that
contribute to that technology other than the IP.

It is also imperative that the appraiser understands the date at which the IP is to be valued. As
the discussion will show, the techniques for valuation are dependent upon information. The
availability and quality of information is influenced by time. The presence of certain market
conditions may vary, the costs incurred in the past need to be placed into the present context
and income streams expected in the future need to be represented at a present date.
Ultimately, the appropriate date will flow from the purpose of the valuation and it should be a
factor agreed by the appraiser and the enterprise at the outset of the valuation task.

5.4 WHO CONDUCTS VALUATION AND HOW TO ENGAGE THAT PERSON?

45 Kamiyama & Shechan & Martinez, supra note 1 at 21-22
46 Ibid

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Indian law does not regulate who can or cannot value intangible property. It is a matter of
skill, experience and the purpose for which the valuation is to be undertaken. If the valuation
is required for a commercial transaction then the criteria for choosing the appraiser will be
determined by the parties to that transaction. If the purpose is related to determining the
financial status of the enterprise then appropriate accounting standards may impact on who is
able to perform the valuation.

As we will see from the discussion in this material an appraiser must have a grasp of a wide
range of disciplines - economic, accounting, financial, legal and management principles to
name but a few. An appraiser needs to be able to understand the market in which the IP has
appeal and the skill to dig out a wealth of information that everyone else in the industry wants
to keep secret. In short, the appraiser needs to have experience; it is essential.

The appraiser will be expected to apply appropriate professional standards in performing the
valuation. In India there is no standard that specifically addresses the valuation of IP. In 1998,
the International Accounting Standards Committee (IASE) published IAS 38 that set out a
new standard on accounting for intangible assets. The International Valuation Standards
Committee has issued a guidance note concerning intangible assets.47

Aside from allowing for specific skills and standards relevant to valuation of IP, on one view
the engagement of an appraiser should not be any different from engaging any other adviser
or consultant. The enterprise should seek referrals from other businesses that have used the
services of the appraiser. The effort in appointing the appraiser should match the risk
associated with the valuation. If the enterprise anticipates that the valuation is important to
the future business operations, such as attracting venture capital or determining the preferred
option between alternative licensees, the enterprise may wish to seek tenders or make detailed
enquiries about the appraiser.

47 See <www.appraisalinstitute.org>.

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5.5 CONTRACT

A written contract should govern the appointment of the appraiser. The appraiser may have
its own standard form consultancy or services contract. It may be in the form of a letter.
Irrespective of the form of the engagement document it is important that the contract clearly
specifies the deliverable that is to flow from the performance of the valuation services. This is
usually a valuation report. The appraiser will determine the form and style of the report but
the contract should identify some fundamental issues to be addressed in the report.

5.6 THE OBJECTIVE

● A statement of objective for the valuation:
● Defines the IP that is to be appraised;
● Defines the legal rights relating to the IP that is to be appraised;
● Identifies the standard against which the valuation is to be determined;
● Identifies the date at which the IP is to be appraised.

5.7 THE PURPOSE FOR THE VALUATION

A statement of the purpose for the valuation identifies:

● The reasons for the valuation;
● How and when the valuation is to be used;
● The people that are expected to rely upon and use the valuation.

5.8 STANDARD OF VALUE

The purpose of the valuation will affect the standard that is to be applied in determining the
valuation. If the IP is to be valued for the purpose of understanding an indication of the return
or price that the enterprise can achieve by commercialising that IP then the most common

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standard will be 'fair market value'. This form of measurement has been tentatively
recommended for the valuation of intangible assets by the IASC and the AASB. This
standard applies a scenario that there is a willing hypothetical transferee and transferor of the
IP. The resulting valuation is therefore a hypothetical answer. The actual transaction will
involve factors that were not envisaged in applying the fair market value standard.

5.9 PREMISE OR ASSUMPTIONS

The appraiser and enterprise should clearly understand the factual circumstances that are
assumed to exist for the purposes of the valuation. For example, are the parties of equal
bargaining strength? Is the industry in an upswing?

The premise should account for circumstances that are realistic for the specified purpose. If
the premise reflects circumstances that are reasonably probable, the use of the IP is legal,
physically possible and financially feasible and such use results in highest profit or other
value (in present day terms) for the enterprise, then the valuation will be based on the highest
and best use of the IP.48 The appraiser will apply his or her professional judgment to
determine whether the circumstances required by the enterprise represent the highest and best
use of the IP.

5.10 THE VALUATION DATE

It is not a step of brilliance to realise that the date of valuation may be made at a date that is
before, at the same time or after the time that the valuation is undertaken. The appropriate
date will be determined by the purpose of the valuation or possibly to adhere to a legislative
requirement.

5.11 APPRAISAL FEES AND PAYMENT

The appraiser will usually perform the appraisal services on the basis of time spent in
performing the task and seek to be engaged on a daily or hourly rate basis. The appraiser

48 See Robert F Reilly and Robert P Schweihs, Valuing Intangible Assets, McGraw Hill 1999, P 62.

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should also give an estimate of the likely cost of the appraisal. It is in the enterprise's interest
to lock in that estimate either as a fixed price or a 'fee not to be exceeded'. The appraiser will
often prefer not to do so unless the appraiser can be relatively certain of the elements of the
task to be undertaken. For this reason, if the appraisal will involve significant research into a
new market, the appraiser may prefer to be engaged on a phased basis where the first phase is
a scoping study.

It is also usual for an appraisal firm to render its invoices on a periodic basis, such as every
month, and may delay delivery of the final report until all prior invoices have been paid. The
enterprise should seek to structure payments so that instalments are paid upon completion of
specified milestones. The negotiation of these issues will be determined by the relative
bargaining strengths of the parties.

5.12 OTHER PERTINENT REQUIREMENTS

The document engaging the appraiser should also specify the following:

● The milestones to be achieved in the appraisal process and the timing for completion
of those milestones;

● The specific individuals who are to perform the appraisal, particularly if the enterprise
has selected the firm of appraisers on the basis that certain individuals will perform
the appraisal.

● The engagement document should clearly state that the appraiser must treat as
confidential all reports prepared by the appraiser and all information provided by the
enterprise. At the end of the engagement, the appraiser should return to the enterprise
all information previously provided by the enterprise.

All IP created by the appraiser in the course of preparing the report (including the report itself
and any earlier drafts) should vest in the enterprise. This will ensure that the enterprise legally
controls the reports. The appraiser may wish to include a provision that clarifies that the
appraiser retains ownership of any templates used in the course of performing the appraisal.

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It is also usual for a standard engagement document proposed by the appraiser to disclaim
any liability if the enterprise were to use the valuation or the report for any purpose other than
the purpose specified in the contract or for any liability arising from information provided by
the enterprise.

The appraiser may wish to be indemnified for any claim made against the appraiser arising
from anything other than the wrongful conduct of the enterprise. The enterprise may wish to
consider placing a cap on such liability to the appraiser although that will be dependent upon
the bargaining strength of the enterprise. Not surprisingly, the enterprise should seek to be
indemnified for any claim made against the enterprise arising from the wrongful conduct of
the appraiser as well as ensuring that the appraiser has appropriate and current professional
indemnity insurance.

5.13 PRINCIPLES OF VALUATION

In its simplest form, valuation is the estimation of present value of the future economic
income that the IP is expected to generate. Ultimately, a valuation is no more than a
prediction of the result of an assumed transaction. It is not mathematically exact. It relies
upon assumptions.

Texts on valuation of intangible assets often emphasise the distinction that should be made
between the concepts of cost, price and value. They are not synonymous or interchangeable
but each may have a role in the process of valuing intangible assets. Cost will usually identify
information concerning the production process. Price reflects information about a transaction
at a particular time, between certain parties influenced by the relevant marketplace.

The valuation methods described below all involve establishing assumptions for the purpose
of the appraisal and collection of information. The assumptions made for the purpose of
valuation are critical and, as noted above, those assumptions should be agreed between the
enterprise and the appraiser. To some extent the assumptions made will depend upon the
nature of information that cannot be acquired.

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The appraiser will rely heavily upon the enterprise for information to perform the appraisal.
This material will identify some of the types of information that the appraiser may require in
order to value the IP of an enterprise.

5.14 METHODS OF VALUATION

There are three fundamental forms of valuation: cost, income and market. Although the
income approach is the predominant methodology applied by appraisers, each of the other
methodologies plays a part in enabling an enterprise to identify 'out of the park' results and
inconsistencies that may be applicable to the enterprise, the technology or the IP. The
objective and purpose of the valuation will directly affect which method will have the
greatest relevance to the valuation.

All three approaches endeavour to achieve the same objective: to determine an indication of
the value of IP asset at a certain date. These methods are not new and have been developed
since tangible property was first considered in a commercial context. All three methods can
be used to assist in the valuation of IP. More than one method can be used to cross check the
application of the principles to allow for any idiosyncrasies arising from assumptions made or
data collected.

The AASB is undertaking a review of the existing Indian Accounting Standards for valuation
of intangibles with a view to achieving consistency with international practices. The timing
for these reviews is unclear. The resulting revised standards are likely to have a significant
impact on the preferred approach by Indian appraisers of IP and enterprise, particularly those
enterprises that will be subject to the Corporations Act requirements that require companies
to apply AASB standards.

The appropriate methodology will largely be determined by the stage of development of the
technology or product. If the technology will take some time to reach the market, then the
cost-based approach will involve fewer variables. At that stage, the purpose of the IP or
technology may not be clear. That uncertainty fades away as the technology is developed.

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The market approach may then become more appropriate. If revenue is imminent then the
income approach becomes feasible.

The process for valuation will often involve some form of due diligence being undertaken
upon the technology and the IP that subsists in that technology. This can require a team of
advisers such as lawyers, accountants, technical experts and marketing personnel.
5.14.1 Cost-based Approach

This method is based upon economic principles of substitution and price equilibrium: the
investor for the IP or associated technology will pay no more than the cost to obtain an asset
of equal utility (rather than functionality).

The cost approach may be useful:

● Where the target IP is new and exchangeable for another intangible asset such as
software where different code may be written to create the same function;

● Where the workforce is the main component that makes the IP worthwhile. This may
be so where the IP is in the form of know-how or the IP related assets require ongoing
input by personnel for that IP asset to be contributing to the business of the enterprise.
An example of this may be operational manuals, policies and records. The appraiser
must assess whether the IP is the subject of the valuation or whether the intangible
asset being valued is in fact the workforce or the know-how held by that workforce;

● As a guide to reproduction at an earlier time;
● To assist in preparation of balance sheets;
● To value highly specialised property such as software, engineering drawings or

distribution networks;
● Where royalty rates are set as a fair rate of return on the cost-based value of the IP;
● When estimating the amount of damages suffered by the owner of the IP in an action

for infringement of its IP rights;
● To acquire insurance for the IP against the cost of recreating the IP or the associated

technology;
● To estimate the remaining useful life of the IP or associated technology.

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The cost approach, however, does have its limitations. It does not reflect the economic factors
that apply to the technology such as current demand for SIMILAR assets and competitor
activity. It does not reflect the economic life of the IP and risk is not directly factored into the
cost approach. Obsolescence must be separately calculated to ensure the valuation is made on
present day terms. Despite great significance in the context of commercialisation of IP, the
cost approach will not inform an enterprise or an appraiser of the likely price a person may be
prepared to pay to acquire the IP.

The application of the cost method involves consideration of the costs of materials, labour,
overheads, and an appropriate margin for profit on such cost elements that encompasses an
incentive for the entrepreneur to undertake the development. To the extent that this involves
accounting for historical costs, the dollar value of those past costs needs to be given a present
day value by applying a factor for inflation such as the consumer price index.

The costs should be specifically associated with the development of the IP. This may present
difficulties where the research plan and budget resulted in more than one form of IP, one of
which is not the subject of the valuation. The appraiser will continue to allocate costs
incurred until the asset has been developed to a commercial stage. The appraiser will need to
make assumptions if the development of the technology is at an early stage.

The total cost may need to be discounted to allow for the fact that the IP may be specific to a
business of the enterprise and its full value to the transferor may not be fully achieved when
owned by the transferee. Also, an asset used in a profitable business is likely to achieve a
higher valuation that reflects the contribution of that asset to the profit earning capacity of the
enterprise.

There are two standard methods of applying the cost approach, known as cost of replacement
and cost of reproduction.

5.14.1.1 Cost of Replacement

The test applied by this approach is to assess the cost for the enterprise to replace the
technology with the equivalent utility or functionality. This approach seeks to reproduce the

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utility, but not necessarily in the same format as the IP that is the subject of the valuation.
This approach does take account of market demand in part because if there is no demand for
the constituent elements of the technology, then that will be factored into the cost of that
element in determining the total replacement cost of the technology.

It may be appropriate to use the cost of replacement method to:

● choose between developing the technology in-house or licensing another person to do
so;

● determine the minimum or 'floor' royalty that the licensor would accept;
● Measure partial loss for insurance purposes.

This approach can involve the assumption that the IP, or the technology in which the IP
subsists, has utility greater than what is the subject of the valuation. If so, the appraiser needs
to make an allowance for this in the valuation.

5.14.1.2 Cost of Reproduction

The cost of reproduction method is used on the premise that a replica of the IP will be made.
That is, what would it cost to recreate the IP in the same format as the IP that is the subject of
the valuation? This method may be useful to compare with valuations determined by other
approaches to the valuation of the target IP and to measure partial loss for insurance
purposes.

The appraiser, when determining costs incurred in the making of the IP or associated
technology, will consider whether the IP was developed in accordance with established
guidelines rather than by a trial and error process. If no such guidelines existed then the
appraiser will allow for costs inherent in a trial and error process.

5.14.1.3 Depreciation and Obsolescence

Depreciation should be applied to the cost methods to allow for deterioration to the asset over
time. Forms of depreciation include physical deterioration (which would not usually apply to

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the IP itself although it may apply to the technology in which the IP subsists), technological
obsolescence (where the original function associated with the IP is not in demand), functional
obsolescence (where the IP cannot fully fulfil the original function and which may result
from the inherent nature of the IP or be due to external influences) or economic obsolescence.
Each of these forms of obsolescence should result in the value of the IP being reduced.

5.14.1.4 International Issues

Application of the cost approach across international boundaries presents its own
considerations. The appraiser will need to consider separate taxation regimes, transportation
costs, costs of supporting the IP and the associated technology and different obsolescence
effects across countries.

5.14.1.5 Data Required for Cost Approach

The appraiser will seek the following types of information in order to apply the cost
approach:

Material costs:

Those costs that relate to the cost of tangibles used in the development of the IP and
associated technology, such as computer lease costs, diskettes, books, and licence fees for
software used.

Labour costs

Those costs arising from human endeavour in developing the IP and associated technology
such as wages, salaries, fees to contractors, workers compensation insurance costs,
superannuation contributions and other employee related taxes payable by the enterprise.

Overhead costs

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These need to be apportioned and the enterprise will usually be in the best position to provide
the relevant figure, which can be verified by the appraiser.

Redevelopment information

The information required to enable the appraiser to calculate the cost of recreating the IP or
technology including time and resources.

Profit/incentive

A component should be included to reflect an incentive for the developer of the IP (which
may or may not be the enterprise) to have undertaken the development and the enterprise for
endeavouring to make a commercial profit from the IP. This is largely a matter of judgment
for the appraiser although the enterprise may have certain policies on the extent of return it
would be expected to achieve in order to undertake the development of the IP.

5.14.2 Market-based Approach

The test applied by this approach is: what is a comparable price or royalty that could be
achieved by similar technologies or IP? If relevant market information is available this
approach can represent the most reliable and accurate form of valuation. That is a big ‘if’
when trying to value IP, for the reasons discussed below.

Unfortunately this test requires the enterprise to identify a comparable product, the sale terms
under which the comparable product is exploited and the existence of independent parties
dealing with the exploitation of the technology. Allowances need to be made for the passage
of time between the valuation date and the date of the comparable transaction. Evidence of a
transaction for comparable IP may not represent the indicative value of the IP that is the
subject of the valuation because that transaction may have encompassed a range of influences
and assumptions that are not applicable to the target IP.

Applying the market-based approach requires significant time and effort to research market
information relevant to the target IP. This has cost implications for the enterprise when

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engaging the appraiser. Depending upon the extent and reliability of information available it
may be possible for the enterprise to determine royalties on the basis of 'norms' for the
applicable industries.

5.14.2.1 Auctions

The cleanest form of determining market value of an asset is by auction.

Difficulties of auctioning IP include:

● Insufficient number of bidders. IP is usually specific to a particular application;
● Publicity costs, time required to adequately notify potential bidders and time needed

to assess the technology or IP;
● Further ongoing involvement of the enterprise is often required to assist the purchaser

to make full use of the IP or technology;
● Proving that the technology in which the IP subsists is well developed.
● International issues

Application of the market approach to IP across countries will depend upon the countries that
need to be considered. For example, information about relevant markets in the United States
may be readily available but that information may not be as robust for markets in developing
countries. The law of the country may have a strong influence on market dynamics.

5.14.2.2 Data Required for Market Approach

Valuation by the market approach depends upon access to public information. This type of
information includes data obtained from the applicable market and assessment of the market
conditions that apply at the valuation date. Examples may include:
● Stock market variations that can be confined to changes to intangible assets and IP in

particular. This may involve business decisions affecting a specific brand of the
business. For example, Philip Morris on one day ('Marlboro Friday') decided to
reduce the retail price of one of its best known branded products by 20 per cent to

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slow down the advancing market of generic products. There was significant slump in
the share price by 23 per cent in one day;
● Where the share price of a company includes a premium that is based upon the grant
of IP registration. For example, failure to renew a patent may result in the share price
falling once that information is announced.

The appraiser will need to acquire evidence of comparable transactions (such as licensing
terms, sales of assets and business that have involved the transfer of IP). Assuming this can
be done, the appraiser should consider whether the market is truly comparable and if not,
whether some allowance can be made for the differentiating factors. The client will often
have a great deal of information about applicable markets. This will greatly assist the
appraiser. The appraiser can assist this stage of the process by determining which information
is relevant. For example, can software used for one industry be applied for another industry?
Are the transactions sufficiently recent?

Even if information is publicly available concerning the transfer of IP, it is unlikely that the
circumstances applying to one technology will be comparable to the technology that an
enterprise wishes to value. For example:

● Industry: the industry in which the technology is applicable affects the valuation. The
cycles experienced by the industry and the competitiveness of the industry will
influence the valuation;'

● Emerging technology: the valuation must account for the likelihood of a new product
superseding the enterprise's technology. This will affect the future earning capacity of
the IP;

● barriers to entry: for example, legislative requirements for therapeutic goods or
chemical approval present barriers to entry because they impose a delay upon new
technology being available to the market;

● Growth in income: are the products receiving or likely to receive the same level of
growth?

● Lifespan: will similar periods or similar robust legal foundations protect the
comparable products?

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The information required for a market-based valuation makes it almost impossible for a small
technology-based enterprise to understand the value of its IP. One methodology is to identify
a publicly listed company that has a comparable business. By doing so, the appraiser can
understand industry cycles, competitive pressures, barriers to entry and emerging
technologies and reasonably extrapolate those elements to the enterprise. The comparable
company should be a company in which institutional investors have a shareholding, there is
active trading in its stock and the company has released publicly available information. These
factors will give comfort to the appraiser that the share price of the comparable company
reflects a valuation given by risk averse but profit seeking investors. The task of identifying
such analogous public companies will not be easy.

Once the data for the market approach has been collected and analysed the appraiser will seek
to verify that:

● The data is factually accurate: this involves checking the source of the data (which is
difficult because transaction documents are usually kept confidential) or by some
other cross check such as access to multiple sources of information. Alternatively, the
appraiser can contact participants to a comparable transaction seeking confirmation of
the details that have been reported to the appraiser.

● The transactions considered were at arm's length: were the parties to the transaction
related? Was a party to the transaction close to insolvency or otherwise has a
significantly inferior bargaining position? Was the transaction part of a litigious
settlement?

● The data and transactions relate only to IP or associated technology: this can be
difficult because often the transfer of the IP will be part of a broader transaction such
as the sale of a business. Nevertheless, an appraiser may be able to determine the
value of the IP contained in that sale by working backwards from the known sale
price of the business enterprise provided of course that the appraiser has access to
other information concerning the comparative business. This may involve applying
the subtraction method where the value of net working capital (current assets less
current liabilities), tangible assets and non-IP intangible assets (including software,
workforce, contracts, distribution networks) are subtracted from the known value of
the overall business.

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The appraiser will often seek guidance from the enterprise that assumptions made about the
comparative transactions are reasonable to the extent that the enterprise is in a position to
offer an opinion. It is prudent for both the appraiser and the enterprise to keep sound written
records of such discussions to ensure that risk is appropriately borne, notwithstanding the
terms of any contract between the appraiser and the enterprise.

The enterprise can assist the appraiser by providing the following types of information
relevant to applying the market approach:

● Giving information about other transactions known to the enterprise that may be
comparable to the target IP or technology;

● Identifying the premium paid on a product where the IP is the distinguishing feature
between the product being valued and its competitors;

● Providing contacts in the relevant industries from whom the appraiser may make
further investigations;

● Describing the potential uses and demand for the IP and technology;
● Explaining the importance of the IP to the business operation including frequency of

use and whether it could be equally important for other businesses;
● Supplying reasons why potential comparable transactions may not satisfy the

compatibility criteria, which would be verified by the appraiser.

5.14.3 Income Approach

The objective of the income approach is to determine future income, measured in present
value that can be expected from the IP or the associated technology. It is important for the
enterprise to recognise that the appraiser is seeking to determine the expected income that can
be earned by the target IP or technology. Income earned by other or related intangible assets
is not relevant. It is important to note that 'income' in the context of valuation of IP or a
business is a reference to cash flow rather than accounting profit.

There are three essential elements to the income approach:

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● Identifying the potential income that can be generated from the asset;
● Assessment of the duration of that income stream; and
● Assessment of the risk associated with the forecasted income.

5.14.3.1 Determining potential income

The task of determining the income stream will be influenced by:

● Whether the income stream could be expected to be constant or not;
● Whether the measure of income relates to revenues to be earned or savings to be

achieved {either from decreases in expenses or investments};
● Whether the projected income will be generated by use of the IP {such as use of a

trademark} ownership of the IP, licensing of the IP (to or by the enterprise) or a
decision not to use the IP {which may protect the competitive position of the
enterprise}.

Past income generated by the IP may be an indicator of projected income although the
appraiser will need to carefully consider factors that may influence changes to historical
income streams. The measure to be applied in the valuation of IP will also influence the
information required by the appraiser. There may be a range of measures of income such as
gross or net revenues, net operating profit, profit before interest and taxes, cash flow after tax
or net cash flow after tax. If the appraiser is applying a measure that is other than gross
revenue, an allowance must be made for expenses incurred in generating the income such as
cost of goods sold and overheads.

There are various forms of the income approach, which have been categorised as49:

● Methods that measure the incremental increase in income that would be derived from
the use of the IP or new technology. A common form is comparing the price payable
of a new patented pharmaceutical that addresses the same illness as a drug that does

49 See Robert F Reilly and Robert P Schweihs, Valuing Intangible Assets, McGraw-Hill, 1999, p 114

26

not use that patent but is still applied for the same illness or the price payable for a
branded shirt compared to a generic shirt;
● Methods that measure the decremental decrease in costs that would be derived from
the use of the IP or new technology such as use of a patented machine that lowers the
cost of producing a shirt;
● Methods that estimate the costs saved by not having to pay a royalty for the use of the
IP or technology (known as the 'relief from royalty method'). This applies the concept
that the enterprise owns the IP and therefore it does not have to pay a licence fee to
acquire that IP. This approach can also be categorised as a market approach to
valuation because it relies upon information from the market;
● Methods that quantify the difference in the value of the overall business of the
enterprise due to owning the IP or technology;
● Methods that estimate the value of the IP or technology as a residual from the overall
value of the value of the enterprise or as a residual from the value of an overall
estimation of the value of the intangible assets of the enterprise. This approach
involves applying a suitable rate of return to all the assets of the enterprise and then
subtracting from those known values to determine the value of the target IP.

5.14.3.2 Determining the Projection Period

Not only must the appraiser consider the period over which the IP will generate income for
the enterprise but also the periods within that 'life of the asset' that may generate different
levels of income. This will affect the method of calculation used by the appraiser in
determining the income stream

5.14.3.3 Assessing the Risk - Discount Rates

Income expected to be received in the future must be recalculated to a figure that reflects
value in present day terms. The rate that converts projected future income to the present value
of that income is referred to as the 'discount rate'. The discount rate is a combination of a 'risk
free' assessment rate (such as the rate obtained with government bonds) and a rate that
reflects the degree of risk associated with obtaining the expected returns from the particular
investment.

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Knowledge of the present value can be important in negotiations for licensing of IP. The
payment income streams determined for licensing fees may be lump sum, periodic or
continuous. By applying an appropriate discount rate the licensor can assess whether the
proposed licence fees reflect an appropriate rate of return.

The discount rate is influenced by:

● Inflation: which reduces the purchasing power of the income stream. A real discount
rate must be applied to equivalent real income streams, not income that is adjusted for
inflation;

● Liquidity: cash has the greatest utility. The easier it is for the enterprise to convert the
asset into cash the greater economic security it will have. IP assets tend to be difficult
to readily convert into cash;

● Risk Free interest rate: if the enterprise could have used the funds to invest in a
secure income producing asset it would be paid a specified interest rate. That rate
reflects the opportunity lost by the enterprise by it investing in the development of the
IP. A common measure of such rates are the rates of return paid on government
bonds;

● Risk premium: an allowance made to account for possible loss of the projected
income streams and the potential for those income streams to vary over time. The
degree of risk will be influenced by the nature of the IP, the stage of technological
development and the nature of the market (degree of demand, number of suppliers,
level of competition, barriers to entry).

It has been suggested that investments in emerging technology carry higher risks with
considerable potential for complete loss of the initial investment. In these circumstances the
rates of return expected by the venture capitalists (who assist enterprises to commercialise
such high risk technology) are an appropriate guide to the applicable rate of return50.
Typically discount rates used for valuing IP are greater than 30 per cent.

50 See Gordon V Smith and Russell L Parr, Valuation of Intellectual Property and Intangible Assets, 3rd ed, pp
555-6

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5.14.3.4 International Issues

The principles of the income approach are well understood internationally. However, the
accounting standards between countries may vary and the currency to be applied to the
projected income may be an important factor. The legal regime concerning the protection of
the IP and the transfer of income between countries may need to be considered. The political
circumstances of a country may influence the risk to be applied for determining the discount
rate.

5.14.3.5 Data Required for Income Approach

The following types of information will often be used by the appraiser to apply the income
approach (depending on the methodology that is adopted):

● The projections made by the enterprise concerning future selling prices, market share
and volume of product that will be sold, cost of goods sold, future capital
expenditures, the rate at which the market takes up the product (penetration rate),
marketing and selling expenses (all of which would be verified by the appraiser);

● Length of time required to obtain regulatory approval for use of the IP and/or its
associated technology;

● The length of time it would take competitors to re-engineer the IP and/or its
associated technology;

● The risk of technical failure associated with introducing the associated new
technology into the market;

● Historical information regarding retail prices, sales, costs profits of the targeted IP and
technology and that of related competitor IP or technology;

● Manufacturing information: what equipment and labour are needed and the associated
costs;

● The extent of further development and R&D expenditure required to bring the
technology to a useful commercial stage;

● Marketing: competition issues, selling prices, market opportunities, market cycles;
● Legal: regulatory requirements to enable the technology to be exploited and IP issues.

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5.15 VALUATION APPROACH AND FORMS OF INTELLECTUAL PROPERTY

Knowing the various valuation methods places us in a better position to know what the
appraiser is talking about. If we know how these methods apply to various forms of IP, the
enterprise can focus on factors that will assist the appraiser, hopefully derive a robust
valuation and be well placed in contract negotiations with other parties to the commercial
transaction.

In some cases, such as computer software, more than one form of IP will subsist in the
technology. The purpose for which that technology is applied will have a bearing on the
appropriate valuation method to be applied and the information to be gathered.

5.15.1 COPYRIGHT

5.15.1.1 Cost Approach

The cost approach is based upon the assumption that an investor wishing to acquire copyright
will not pay more than the cost to purchase or construct a substitute property. Since the
Copyright Act 1957 vests in the owner of the copyright monopoly rights in the copyright
work, it is not legally possible to create a substitute version or 'copy' of the copyright work
unless the creation is done independently of the copyright work. The cost approach therefore
can only provide the enterprise with an indication of the lowest possible value of the
copyright work, being the cost incurred in creating that copyright work.

The application of the replacement cost method may result in a lower valuation than the
application of the reproduction method (the cost of constructing an exact replica of the
copyright work) due to technological advances, particularly in relation to computer software
copyright works.

The appraiser will need to account for any obsolescence relevant to the IP or technology. This
will include considering whether the technology is maintained and enhanced. Technological
obsolescence may occur in relation to software if the software is not written in up-to-date
language or is reliant upon an outdated platform.

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5.15.1.2 Market Approach

Obviously, much depends upon the nature of the copyright work. Software, for example, may
have a ready market from which appropriate market information can be obtained to enable
the market approach to be applied. However, firm evidence of market transactions can be
difficult to obtain because the parties seek to keep the transactions confidential.

Licensing of copyright works presents the most reliable form of market information that can
be used to value the copyright.

5.15.1.3 Income Approach

Any or all forms of the income approach methodologies (incremental analysis, profit split or
royalty income) may be applied depending on the nature of information available to the
appraiser. The appraiser must form a view as to the useful life of: copyright work for the
purposes of determining the income stream and this will often be less than the legal life of the
copyright work, particularly for computer software.

Information that is relevant to a copyright work includes the remaining legal and economic
life of the work, which of the copyrights are being used and any known impediments to the
use of the copyrights.

The appraiser may also refer to:

● information provided by Copyright Agency Limited;
● decisions by the Copyright Tribunal and courts in which there may be a market for the

copyright work;
● professional societies such as LES or International Licensing Industry and

Merchandisers Association.

5.15.2 TRADEMARKS, BRANDS AND DOMAIN NAMES

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The greatest difficulties in valuing trademarks and brands is separating other factors that
contribute to the success of the product or business that is designated by the trademark or
brand. An enterprise may use more than one brand to generate its income. Often the
enterprise will leverage off a core or primary brand. Valuation of contributory factors and
secondary brands need to account for the influence of the primary brand upon the estimated
value of the secondary brand.

Valuation of domain names faces similar issues as trademarks and brands. The context of
web pages and the internet in general presents a special flavour for the appraiser. Any laws
that prevent the use of the domain name by a regulatory entity will restrict the value of the
domain name. Current registration requirements for the dot.com registry prevent registration
unless the domain name is linked with the name of the applicant. The value of the domain
name may be inseparable from the website and its popularity will be due to the content.

5.15.2.1 Cost Approach

The cost of reproduction approach is possible if historical data is available concerning the
creation of the brand. The cost of replacement approach would not usually be applicable
because the brand will be unique and so theoretically the brand cannot be re-created in some
other form.

The cost approach would usually be expected to indicate a low valuation which would not
truly represent the market value of the brand. The brand may be the result of the use of a
name, an informal brainstorming session or have involved the engagement of experts,
designers and market analysts. The recognition of the brand may result from the lapse of time
or a concerted marketing strategy. The costs incurred in the development of the brand may be
small or significant.

5.15.2.2 Market Approach

The market approach may be useful if the appraiser has data of assignments of brands that are
comparable to the brand that is being assessed. Unfortunately, it is rare for such data to be
publicly available. It is possible to resort to the subtraction method although many businesses

32

will have more than one brand and unless discrete figures are known for each brand it may be
difficult to reliably deduce the valuation applicable to the comparable brand.

The brand can be valued on the basis of the royalty income that it could generate by licensing
to others on an arm's length basis. An important factor is the assessment of the remaining
useful life of the brand. A registered trademark may be registered forever by maintaining
appropriate renewals of registration. The market value of the brand, however, may be less if
the goodwill associated with the brand is diminished due to poor performance of the
enterprise or the industry in which the enterprise carries on business.

If the market information is available, a brand may be valued by reference to the premium
price payable for the branded article compared to generic goods of the same type.

5.15.2.3 Income Approach

The difficulty with the income approach is establishing the link between income projected
and the brand because the brand is one mechanism to attract clients whereas enterprises will
apply a range of strategies to attract clients. The projected life of a brand depends upon a
broad range of factors such as the support given by the enterprise to the maintenance of the
brand, the performance of the enterprise itself and the trends experienced in the market.

5.15.2.4 Data Required for Valuation of Trademarks and Brands

The appraiser may refer to:

● the influence of primary trademarks upon the target secondary trademarks;
● the attention and support provided by management of the enterprise to the

maintenance, marketing and development of the brands;
● advertising and promotional expenses as reported by the enterprise in its financial

statements and accounts;
● historical revenue received that relates to the trademark or brands;
● brands of competitors to the enterprise;

33

● the market share enjoyed by the products or services that are marked by the brand and
the ability of that brand to influence the market;

● the level of demand for the branded products and the trend for that demand over time;
● the retail price of the branded products or services and the retail price of generic

forms of the same types of the goods or services;
● evidence of transfers of brands of other companies in the same or similar industries to

the enterprise;
● development and maintenance costs concerning the brands.
● information relating the strengths and weaknesses of the brands of the enterprise;
● whether the brand is registered as a trademark, the jurisdictions in which it is

registered, the degree of infringement activity and the response of the enterprise;
● decisions by the courts in which there may be a market for the brand or similar

brands;
● specialist texts or external data resources concerning trademark licensing.

5.15.3 PATENTS AND CONFIDENTIAL INFORMATION

All three standard valuation approaches can be applied to the valuation of patents. However,
the usefulness of the approaches varies according to the integrity of the information available.
The legal life of a patent will often outlast its economic value as new innovations cause the
target patent to be superseded. Whether this is so will depend upon the scope of the claims
within the patent and the breadth of the potential applications.

The significant costs associated with developing patent related technology and applying for
and maintaining patents are an incentive for an enterprise to understand the value of the
patent and related technology as early as possible. In this context 'rules of thumb' may be of
assistance where a qualitative methodology has greater influence than a quantitative analysis
that may be associated with the three standard approaches51.

51 see, for example, Robert S Bramson, 'Rules of Thumb: Valuing Patents and Technologies', Les Nouvelles,
Vol XXXIV, No 4 December 1999, p 149

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Similar issues apply to confidential information except that the potential legal life of this
form of IP is limitless. Confidential information is often linked with people who have the
know-how and the secrets. The scope for those people to leave the enterprise will need to be
considered by the appraiser. The appraiser will also consider the procedures applied by the
enterprise to prevent unauthorised disclosure of the confidential information.

5.15.3.1 Cost Approach

Application of the replacement cost method will result in a valuation of technology that has
the same utility as the target patent and related technology. The appraiser will need to account
(or discount) for the fact that greater utility may have been achieved because contemporary
creation methods are assumed to be used in the development of the technology. Allowance
must also be made for obsolescence.

The appraiser will need to tread carefully to distinguish between R&D expenses that led to
the patented technology and those expenses that were indirect to it or led to a separate form
of technology. The lapse of time between the incurring of costs of early research and the time
of valuation may prevent identification of the relevant costs.

5.15.3.2 Market Approach

The market approach is often used for patents because there will usually be an existing
market for a comparable product. Of course, there will be occasions when the 'next big thing'
arrives where the innovation has no obvious market demand. In these circumstances, the
market approach may be inappropriate.

5.15.3.3 Income Approach

Projection of income derived from patents can be estimated by having regard to the premium
in pricing of the patented article that would be lost if the patent expires and generic articles
are able to be legitimately produced. This can be witnessed in relation to pharmaceutical
products when the patent of the drug expires. In some instances a pharmacy company may
develop its own generic drug to develop a brand allegiance before the expiry of the patent. In

35

those circumstances the price differential between the two drugs will be a reasonable basis for
valuing the patent. The appraiser will need to consider the factors that may prevent direct
comparison between the goods such as increased branding and marketing costs for the
generic product.

The IP rights associated with patents are inter-linked with the product or process that is to be
sold. This means that the market approach will be a useful check against projected income.
The income approach can be used to assess savings from greater efficiencies in a
manufacturing process that is the subject of a patent.

The expense associated with developing innovation (particularly in the biotechnology fields),
participating in clinical trials and prosecuting multi-jurisdictional patents is well known.
However, R&D costs will not be relevant to determining valuation on the basis of the income
approach.

The portfolio of products or technology that the enterprise has in the pipeline will influence
the risk factor that the appraiser applies. In relation to the development of drugs, only one in
five thousand compounds that enter into the preclinical-trial testing graduate to human testing
and after that, only one in five are approved52. Even fewer are actually marketed. So the
enterprise that relies on one patented product will bear a greater degree of risk.

Other factors that will affect the risk discount applied to determine the value of patent
include:

● the likelihood of the patent being granted;
● whether the patent is standard or innovation;
● the period of time in which the patented product will be in demand once it reaches the

market;
● the position that the technology will achieve in the market;
● the degree of control that the enterprise can exercise to prevent competitor products.

52 See Bratic V W, Tilton P and Balakrishnan M, 'Navigating Through a Biotech Valuation' at
<www.pwcglobal.com>

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5.15.3.4 Data Required for Valuation Of Patents

The appraiser may refer to:

● financial statements, accounts and budgets;
● payroll, time recording and laboratory records;
● details of technology licensed-in by the enterprise;
● descriptions of trade secrets and other confidential information used by the enterprise;
● the stage of development of the technology;
● the legal and economic life of the patent;
● market opportunities;
● competitor technologies;
● barriers to entry into the market.

5.16 VALUATION REPORT

The valuation report is the primary outcome or deliverable that the enterprise expects to
receive from the appraiser. The final report presented by the appraiser to the enterprise would
be expected to:

● Conform with relevant professional standards applicable to the valuation of intangible
assets. In the United States, appraisers of tangible or real property are expected to
conform with the Uniform Standards of Professional Appraisal Practice (USPAP)
which sets out reporting standards, documentation and record retention
requirements53. There is not an Indian equivalent to the USPAP, although there is no
reason why the principles contained in the USPAP standards could not form the basis
for the services to be performed by an Indian appraiser of IP. In particular the USPAP
requires that any appraisal report not be misleading, contain sufficient information to
enable the intended audience to understand it and accurately reflect and disclose any
extraordinary assumption that directly affects the appraisal (including the impact that
the assumption has on the value of the IP);

53 See <www.appraisalfoundation.org>

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● Provide a clear statement, free from jargon, of the estimated value of the IP or
technology and the reasoning behind that conclusion. This description should be
sufficient to reflect the complexity of the task and the impediments that were found in
undertaking the appraisal;

● Have an analysis of the market conditions that influenced the conclusion and an
analysis of known trends that might affect future income that may be earned from the
IP or technology;

● Include appropriate documentation supporting the conclusion and analysis;
● Incorporate any assumptions made in the course of preparing the report, which should

have been cleared with the enterprise before the task was commenced, or at least,
before the final report is submitted;
● Include a statement of contingent and limiting conditions and any professional
qualifications responsible for the valuation;
● Explain the reasons for any decision not to use any of the standard methodologies and
any reconciliation of differences arising from the application of the different
methodologies;
● Explain any adjustments made to financial information provided by the enterprise.

Standard Rule 10-3 of the USP AP states that each appraisal report must contain a
certification by the appraiser that conforms to a particular content. The appraiser confirms
that:

5.16.1 INTELLECTUAL VALUATION REPORT CERTIFICATION

The statement of facts are true and The valuation was prepared in

correct accordance with the USPAP

The appraiser has no interest in The engagement of the appraiser

either the target IP or technology was not contingent upon

or either of the parties who may developing or reporting

use the valuation predetermined results

The fee payable to the appraiser is The analysis, opinions and

not influenced by the valuation, conclusions are limited by the

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the achievement of any particular express assumptions and limiting
result or the occurrence of an conditions and are impartial and
event directly related to the use of unbiased
the valuation report

The estimation of value of IP is a malleable process. It is no surprise therefore that normal
valuation practice entails the appraiser expressing his or her view as a range of values
stipulating expected high and low values. More often than not much reliance will be made of
known past transactions for IP that is similar but not really comparable. If the enterprise and
the appraiser do not reach an accord on their expectation both will be disappointed.
Nevertheless, the valuation of IP is often a necessary stage in the commercialisation of IP and
will be required by at least one party to a major transaction. Preparation of IP valuation and
an understanding of the methods and processes applied will enable the enterprise to critically
assess financial proposals from other parties and negotiate from a position of knowledge.

5.17 BRANDS, VALUATION AND WEALTH

It is accepted in the present commercial scenario that brands do create wealth. Maximising
brand value is simply a function of maximising shareholder value; a goal that effective
managers of all quoted companies recognise. Companies have increasingly come to be
recognised and indeed reorganised around brands. Even in classic branded FMCG
companies such as Unilever, their importance has been given a higher priority. In their recent
reorganisation, premium brands worldwide were specifically named as a key responsibility of
the chairman of the operating divisions. This is far removed from the old model of brand
manager control.

Balance sheet issues may have provided the impetus for the development of brand valuation,
but its application does not stop there. There is certainly no doubt that more information on
brands, brand performance and brand value should be disclosed in financial accounts.
Companies are however vary of doing so and of disclosing the kind of information that they
feel is competitively sensitive, and unless this is done their statements concerning brands end
up appealing ‘like idle rhetoric’ and of little real use of investors.

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Brand valuation can also be used in the planning and structuring of mergers and acquisitions.
A significant amount of explicit comment was made by both sides about brand value in the
Rowntree/Nestle and Granada/Forte takeovers, with all parties claiming to be able to
maximise the value of the brands involved.

A similar role can also be seen in investor relations. Merrill Lynch issued a broker’s circular
in 1996 that argued that the share price of Burmah Castrol would have to increase by
somewhere between 25 percent and 50 percent in order to cover the analyst’s estimates of
Castrol’s ‘brand value’. In a similar vein, both P & G and Unilever Annual Reports would not
be complete without the (respective) Chief Executives reiterating their commitment to
building their portfolios of leading brands. The purpose of such communication can also be
focussed for an internal audience, and indeed can be used as explicit benchmarks for
performance in rewarding management. Brand valuations of portfolios can also be used to
help the crucial task of resource allocation and as a tool for evaluating the success of the
decisions made.

Franchising and licensing transactions, within corporations or with their third parties, are
increasingly popular and can also have implications for tax planning. Brand valuations have
also been used in supporting negotiations with tax authorities, in supporting court claims for
damages in cases of ‘passing off’ or in defending actions of unfair trading and even in
specific use of brands as a securitised asset to back specific borrowing.

Irrespective of its purpose, and recognising that it is only a single measure, it is no
exaggeration to say that brand valuation has become an important technique for evaluating
businesses. The growing importance of valuation mirrors the growing importance of brands
to the companies that own them.

One crucial aspect mentioned is the fiscal implication of charging international/overseas
subsidiaries and third-party licensees a proper royalty fee for the use of brands.
Organisations worldwide, particularly universities, have yet to realise that the royalty rates
they demand are negligible in comparison to the value of the trademark or service mark asset
being licensed. Increasing the royalty rate demanded not only has managerial benefits but
also transfer pricing advantages.

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This imbalance of power could, be greatly improved in two ways54:

● If companies took a more scientific approach to the setting of royalty rates rather than
relying on what has been done in the past.

● If companies pooled their royalty rate information so that they were as well informed
as the tax authorities with whom they were arguing.

The managerial and fiscal implication of trade mark licensing are profound and that brand
valuation has a key role to play in adding method and objectivity to an area which in the past
has been plagued by doubt and misunderstanding.

5.17.1 Brand Valuation: The Issues

The valuation of brands is a relatively new concept and although brands are bought and sold
independently from other business assets, there is no identifiable market in brands as such.
Brand valuation is therefore claimed to be in part an art, not an exact science, and necessarily
involves judgment. It also involves specialists in three quite separate and hitherto unrelated
disciplines – marketing, accountancy and finance, and law. In order to conduct a proper
valuation an unusual, even unique, blending of professional skills is therefore required. Also,
any methodology must deal both with hard ascertainable factual information (e.g. market
shares, sales and profits) as well as rather ‘softer’ qualitative information and skilled,
professional judgement is needed in assessing brand strength and in determining brand-
related profit.

5.17.2 Fundamental Assumptions

54 Interbrand [www.interbrand.com/www.brandchannel.com], is a good example of an institution actively
involved in both these areas. Having valued more than 1,000 brands in the past 6 years (with an aggregate value
of over $25 billion) Interbrand can with confidence assess service and product brands and compute values and
derive royalty rates that stand up to third-party scrutiny. Interbrand is also initiating - with the sponsorship
currently of half a dozen major branded goods businesses - a shared database of royalty rates. This will enable
companies to source information (protected, of course, by rules of confidentiality) that can help them in
justifying higher and more realistic royalty rates. The issues of the role of licensing and the share of information
is being studied by Interbrand and Preconcept [www.preconcept.org].

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The value of a brand encompasses the particular values attributable to the trademark, logo,
packing and get-up, as well as to the recipe, formulation or raw material mix. In other words,
brand value as a term embraces all the proprietary intellectual property rights encompassed
by the brand. Thus for the purposes of evaluation a brand has to be understood as an ‘active
trade mark’; a trade mark actually used in relation to goods or services and which has,
through use, acquired associations and value.

The Interbrand methodology, for instance, when used for balance sheet purposes, deals with
existing use and does not take account of any unrealized ‘stretch’ factors (e.g. line extensions
or licensing)55. Nor is it normally concerned with the break-up value of a company’s brands
or with the valuation that, under different circumstances, a third party might put on them.

5.17.2 Alternative Systems

When developing an ‘existing use’ valuation methodology a variety of possible methods have
been explored.

5.17.2.1 Premium Pricing

This system is based upon the extra price (or profit) which a branded product may command
over an unbranded or generic equivalent. However, the major benefits which branded
products offer to manufacturers often relate to security and stability of future demand and
effective utilization of assets rather than to premium pricing, so premium pricing is rarely an
acceptable method of brand valuation. Moreover, a strong brand which the retailer must stock
due to customer demand also provides its owner with a platform for the sale of additional
products and, at practical level, it should be remembered as well that many branded products
(for example, most perfumes) have no generic equivalents and in many instances ( e.g. that
of the Mars bar), it is difficult to conceive that a generically equivalent product could be
offered at anything like as keen a price as the branded product. Furthermore, selling prices
are often related to short-term tactical factors, a factor which makes it difficult to apply any
methodology based solely upon this concept. Therefore the value of a brand clearly cannot be

55 This is a major oversight in the Interbrand valuation system, which perhaps needs to be worked on. The
impact of licensing, franchising and more importantly, line extensions, cannot be ignored.

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determined by premium pricing alone, though evidence of a strong price premium may well
serve as a clear indication of brand strength and may therefore play an important part in a
valuation.

5.17.2.2 Esteem

There have been moves, particularly in the United States, to develop brand valuation
methodologies based principally on measures of brand recognition, esteem or awareness.
Although the Interbrand methodology recognizes that awareness and esteem can be critical to
a brand’s success (and are therefore factors to be considered when assessing the overall
strength of the brand), to build a model using such ‘soft’ measures is inappropriate.

5.17.2.3 Historical Cost

As balance sheets are traditionally drawn up on an historical cost basis it was necessary to
consider valuation systems based upon the aggregate of all marketing, advertising and
research and development expenditure devoted to the brand over a period of time. This
approach was, however, rejected quite quickly; if the value of a brand is a function of the cost
of its development, failed brands may well be attributed high values and skilfully managed,
powerful and profitable brands with modest budget could well be undervalued56.

5.17.2.4 Discounted cash flow

The concept of using discounted cash flow (DCF) techniques to achieve a brand valuation is
attractive. Strong brands are, in effect, a form of annuity to their owners, so any system which
can accurately assess the value of future cash flows is entirely supportable. The problem of
DCF lies in its sensitivity; wide fluctuations can arise from relatively minor shifts in inflation
and/or interest rate assumptions. This factor, coupled with the range of cash flows which can
result from the differing brand development assumptions, means that DCF, although
conceptually a strong system, has to be handled with care. Even when these difficulties can
be overcome the valuer has the practical problem that he is generally given little time to

56 Also, determining the historical cost value of most brands would be a near-impossible task.

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complete the valuation and often has to satisfy auditors. In such situations modelling
techniques using DCF can be hard to apply57.

5.17.2.5 Interbrand’s ‘Multiple Approach’

The approach most frequently adopted by Interbrand (and which is now, it must be said, most
widely used by others) is an earnings multiple system, i.e. appropriate multiple is applied to
the earnings of the brand. Conceptually the system is sound ( the arguments which support a
discounted cash flow system apply equally to an earnings multiple system) and, practically,
the system is robust, auditable and the valuation can be completed in a relatively short time
frame, provided always that the requisite marketing, financial and trade mark legal skills are
brought together. The system also has the real advantage that it is based upon hard, proven
‘auditable’ data.

To determine a brand’s value, then, certain key factors need to be determined:

● Brand earnings ( or cash flows)
● Brand strength ( which sets the multiple or discount rate)
● The range of multiples (or discount rates) to be applied to brand earnings.

In addition, it is necessary of course to check whether or not the brand owner has, in fact, title
to the brand and also the quality of this title.

5.17.2.6 Brand Earnings

A vital factor in determining the value of a brand is its profitability or potential profitability,
particularly its profitability over time. However, to arrive at a balance sheet value it is not
enough merely to apply a simple multiplier to post-tax profits. Firstly, not all of the
profitability of a brand can necessarily be applied to the valuation of that brand. A brand may
be essentially a commodity product or may gain much of its profitability from its distribution

57 Notwithstanding this, the Interbrand approach detailed below is closely related to the DCF approach and DCF
techniques are frequently used in conjunction with the Interbrand ‘earnings multiple’ approach.

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system. The elements of profitability which do not result from the brand’s identity must
therefore be excluded. Secondly, the valuation itself may be materially affected by using a
singly, possible unrepresentative year’s profit. For this reason, a smoothing element should
be introduced; generally, a three-year weighted average of historical profits is used.

The following issues must therefore be taken into consideration in calculating brand earnings:

5.17.10.7 Determining Brand Profits

Since it is the worth of the brand to the business which is being valued, it is important that the
profit on which this valuation is based is clearly defined. For balance sheet purposes, this
profit must be the fully absorbed profit of the brand after allocation of central overhead costs
but before interest charges. Taxation is, of course, also deducted, as will be explained later.
For the purposes of evaluating the brand, interest costs are ignored since the basis of funding
chosen for the brand is irrelevant to the brand’s performance. (Were interest to be included
in the calculation, the valuation could be materially affected by changes in corporate
financing arrangements; as such arrangements are generally not brand-related they are
normally excluded when determining profit).

The elimination of private label production profits:

The profits to which an earnings multiple is applied must relate only to the brand being
valued and not to other, unbranded goods which may be produced in parallel with the brand
but which are not sold under the brand name. These profits may be separately identified by
the company through its accounting systems; alternatively, judgment may need to be
exercised in assessing the extent of such profits based on production volumes, sales values or
other acceptable methods. Insofar as ‘allocation’ is too much accountancy, the elimination of
‘own label’ profits has been found to be entirely feasible.

The restatement of historical profits to present-day values:

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Since historical earnings from the basis of the valuation, these values must be re-stated to
present-day figures by adjustments for inflation. This has the effect of ensuring that
performance is reviewed at constant levels

The weighting of historical earnings:

A weighting factor is applied to historical earnings so as to determine a prudent and
conservative level of ongoing profitability to which to apply an appropriate multiple. Thus,
once historical profits have been adjusted to present-day values a weighting factor must be
applied to each year’s brand profits, which reflects the importance of those profits to the
valuation. In many cases a simple weighting of three times for the current year, twice for the
previous year and once for the year before that is used. These aggregate earnings are then
divided by the sum of the weighting factors used.

Provision for decline:

There is a basic accounting rule that benefits should only be taken when they are earned, but
that losses should be provided for as soon as they are known. This rule further implies that,
in a brand valuation for balance sheet purposes, future brand profitability must be reviewed
so as to see whether the profits on which the valuation is based will be maintained. Where the
weighted average historical earnings are clearly below the forecast brand profits in future
years, no provision for decline is necessary, provided of course that the forecast is reasonable
and can be justified. However, it may be necessary to review the weighting allocating if
forecast future earnings are significantly in excess of the weighted average profit value and
are expected to remain at this level in the foreseeable future. It could well be, for example,
that historical profits may have been depressed by factors now brought under control and it
may be appropriate therefore to place greater reliance on more recent earnings when arriving
at a valuation. Where, however, the weighted average earnings are greater than the forecast
future brand profits, a provision for decline may be necessary to reflect the reduced level of
future profitability.

Remuneration of capital:

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For the purposes of valuation, to apply a multiple to all the profitability of a brand potentially
overvalues that brand. Not all the resulting capital sum can be attributed to the brand itself –
some of it necessarily reflects the value of the other assets employed in the line, e.g. the
distribution systems, the fixed assets, and the management. Or, put another way, if one fails
to deduct a suitable return for the other assets employed on the brand there will, arguably, be
double counting on the balance sheet.

There are several ways of identifying and eliminating earnings that do not relate to the brand
strength. The most frequent system is that of charging the capital tied up in the production of
the brand with the return one might expect to achieve if one was simply producing a generic.
Such an assessment obviously requires analysis and judgment. But as a general rule, the non-
brand-related returns one would expect in an industry where brands play a relatively
insignificant role (e.g. heavy engineering) will be greater than those where brands are critical
to success ( e.g. cosmetics or fragrances). Provided one is dealing with the current cost of
assets of real return in the 5-10 per cent range is normal and can be used as a capital
remuneration figure.

Taxation:

The multiples we use are applied to the brand’s post-tax profit figures. Therefore it is vital
that all the reported earnings are collected on the same basis. A tax rate is normally applied
which is the medium-term-effective tax rate forecast for the company.

5.17.2.8 Brand Strength

The determination of the multiple (or the discount rate in the case of DCF valuations) to be
applied to brand profit is derived from an in-depth assessment of brand strength, as it is brand
strength which determines the reliability of a brand’s future cash flow. The assessment of
brand strength requires a detailed review of each brand, its positioning, the market in which it
operates, competition, past performance, future plans and risks to the brand. The brand
strength is a compromise of seven weighted factors, each of which is scored according to
clearly established and consistent guidelines. These key factors are as follows:

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Leadership:

A brand which leads its market sector is generally a more stable and valuable property than a
brand lower down the order. The score highly in the area of leadership a brand must be a
dominant force in its sector with a strong market share. It must therefore be able to influence
its market, set price points, command distribution and resist competitive invasions.

Stability:

Long-established brands which command consumer loyalty and have become part of the
‘fabric’ of their markets are particularly valuable and are normally afforded high scores.

Market:

Brands in markets such as food, drinks, and publishing are prima facie stronger than brands
in, for example, high tech. Or clothing areas as these markets are more vulnerable to
technological or fashion changes. A brand in a stable but growing market with strong
barriers to entry will thus score particularly highly.

Internationality:

Brands which have proven international acceptance and appeal are inherently stronger than
national or regional brands. Significant investments will have been incurred in the
geographical development of such brands and they are less susceptible to competitive attack.
They are, therefore, more robust and stable assets. Moreover, by no means all brands are
capable of crossing cultural and national barriers so those that are must be considered as
particularly valuable assets.

Trend:

The overall long-term trend of the brand is an important measure of its ability to remain
contemporary and relevant to consumers, and hence of its value.

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Support:

Those brands which have received consistent investment and focused support usually have a
much stronger franchise than those which have not. While the amount spent in supporting a
brand is important, the quality of this support is equally significant.

Protection:

A registered trade mark is a statutory monopoly in a name, device, or in a combination of
these two. Other protection may exist in common law, at least in certain countries. The
strength and breadth of the brand’s protection is critical in assessing its strength. Indeed, if
the legal basis of the brand is suspect it may not be possible to apply a value to the brand at
all for balance sheet purposes.

5.18 VALUATION APPLICATIONS

It is perhaps important to examine technical aspects of valuation for balance sheet purposes,
both of ‘home grown’ and acquired brands. There are, of course, many other situations where
brand valuations can usefully be used and where the same basic methodology can be applied.
The assessment of the strength of the brand, for example, is unlikely to change greatly
whatever the situation (and this is the area of the valuation process which normally requires
the most detailed and time-consuming investigations) though attributable brand earnings, and
the appropriate multiple could vary considerably58.

It should also be noted that even when the valuation is based upon notional royalty rates or
upon discounted future earnings, it is first necessary to identify brand earnings and review
carefully the reliability of future income flows. In other words, the key elements of this
methodology – the assessment of brand earnings and of brand strength – need to be followed
whatever procedure is used to derive a valuation.

58 In the case of acquisitions, for example, synergy benefits could be identified and incorporated into the brand
profits. Also it may be appropriate to include an acquisition premium.

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5.19 VALUATION AND LICENSING OF INTELLECTUAL PROPERTY

The licensing of technological know-how and patents has been long-established and it is
accepted that often significant royalties should be paid by licensees for the use of such assets.
Moreover, the agreements governing such licenses are often very complex and recognise that
the maintenance of the value of the intangible asset is an important task and is the duty of
both the licenser and the licensee. Until recently, however, trade mark licenses were not
treated seriously and indeed sometimes were just added in as the ‘icing on the cake’ of
patent/technology licenses. But the increasing awareness of the value of brands has prompted
brand owners to wake up to the notion that, although intangible, such properties do have
significant value and that their licensing cannot be regarded as a mere formality.

One of the first effects of this is that license agreements with third parties now pay much
more attention to the fact that the property being licensed is valuable. Higher royalty rates
are being demanded (and justified) and stricter conditions to ensure that proper use and
maintenance of trade marks - both in legal terms and in marketing terms - are put in place59.
For example, licensees will often now participate with the brand owner in the development of
global advertising campaigns and the design of visual identity programmes. It is only in this
way that the integrity, and thus the value, of a brand can be safeguarded.

But trademark licenses are not only being used with third parties. Many companies (of which
Nestlé is the most famous example) have a policy of owning all intellectual property centrally
and charging subsidiaries for its use. Thus, for example, even though many of the brands
acquired as part of Rowntree are purely British brands (Quality Street, After Eight, etc.), they
are all now owned by the Swiss company and licensed back to the English company. This
has a number of implications:

Use of brands is controlled centrally and directed to the benefit of the whole group and not
just of a subsidiary.

59 For example, it is not uncommon to find third party licensees (and not just of luxury goods brands) being
subjected to the strictest quality inspections. Their duty as licensees is more onerous but at the same time their
contribution is seen as greater.

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