[The Viewpoint] The nitty gritty of commercialization of brands

Trademarks, which are a means of distinguishing one’s goods or services from those of others, are one of the most valuable intangible assets that a business can possess. Whether we realize it or not, all of us encounter trademarks, colloquially knowns as “brands”, on a daily basis.

Brands serve several significant purposes for businesses, like acting as efficient commercial communication tools for capturing consumer attention or serving as valuable assets that grow as the reputation of the business grows. They also act as a property asset that can be purchased, sold, licensed or used as a security interest or lien to secure a loan. Thus, it has become imperative for businesses to create and develop brands that establish an identity for them in crowded marketplaces. Once a brand is created, it must be protected, and eventually commercialized.

Valuation of a brand

Commercialization of a brand essentially refers to making the brand marketable and earning profits through it. However, before commercializing a brand, it is essential to determine the value of a brand as accurately as possible. The paradox of valuation is that while most businesses are aware of the potential value of their brands, they invariably fail to determine this value with utmost accuracy. In the words of Peter Drucker, the Austrian-American management consultant, “if you cannot measure it, you cannot manage it.”

The value of a brand lies in the goodwill associated with it, which is an intangible asset of the brand owner’s business. Assigning a monetary value to a brand can be a daunting task owing to the different variables that must be considered. For instance, reasonable people may have a difference of opinion of future business expectations such as marketplace risks, threats from competitors or opportunities for increasing business value, all of which may affect the value of the goodwill of the business and, consequently, of the brands that are symbols of that goodwill.

Valuation is a complex process and requires skilled professionals to evaluate the assets. Some of the most common methods of brand valuation are:

(1) The market approach, which assigns a monetary value to a brand based on comparisons of transactions, such as royalty rate involving similar brands. For example, if a well-known brand in the same industry was assigned or sold for ₹50 lakh, then such data can be used as a yardstick to arrive at the valuation of another brand in the same industry.

(2) The future income approach, in which a monetary value is assigned to a brand based on the expected future income attributable to the brand. For example, if a well-known brand earns a license/franchise fee of ₹50 lakh every year, then all such future cash flows are discounted to arrive at a valuation for the brand today.

(3) The cost approach, in which a monetary value is assigned to a brand based on the cost accrued in terms of advertising and brand building and the cost of replacing the brand with a brand of an equivalent market power.

(4) The relief from royalty approach, in which a monetary value is assigned to a brand based on the expected royalty savings due to the ownership of the brand. For example, data relating to royalties earned from the same or similar brand and additional revenue on account of the brand can be used to arrive at a valuation under this method.

Different ways of commercialization of brands

Commercialization can take various forms, such as using a brand to grow a consumer base, developing franchising or licensing models or selling a lucrative brand to a third-party. Set out below are a few ways in which business owners can commercialize their brands and earn profits through them.

1. Direct use during the course of business: The most obvious way for a business to turn a brand into a source of revenue is by using it in association with its goods and/or services. Using a brand can assist in growing the reputation of a business, strengthening the presence of the brand in the existing market or expanding the geographical reach of the brand. In fact, extensive and/or continuous use of a brand may result in the brand becoming well-known or famous, entailing several commercial benefits to its owner, such as the scope of expanding into different industries by using the well-known brand for different/unrelated goods and/or services. Moreover, the greater public recognition a brand commands, the more valuable it is, and the more likely it is to secure a higher selling/leasing price is any commercial transaction.

2. Licensing: Licensing is an effective tool through which a brand owner can commercialize her/his brand without transferring the ownership of the brand to a third-party. Through licensing, a brand owner can give rights to another party to use the brand within the terms of the licensing agreement in exchange for a fee, usually called a royalty. There are different types of licensing agreements such as an exclusive license, where except the named licensee, no company or person, including the licensor, can use the licensed brand; a sole license where both the licensor and the licensee can use the brand, but the licensor is not allowed to license the brand to others; and a non-exclusive license, through which a licensor can allow any number of licensees to use the same brand.

The main benefit that licensing offers is that it gives the licensor the flexibility to “carve out” the rights that it wishes to grant to a licensee. For instance, permitted use by a licensee can be limited to specific geographic territory(s), a specific period of time or a specific manner/ n a specific field. Licensing is an important tool in the commercialization of brands as it can extend the geographic range as well as the product range of the brand. However, what is key to a licensing model is entering into a carefully drafted licensing agreement that satisfies the requirements of any applicable laws and adequately protects the brand owner’s rights.

3. Franchising: Franchising is a method of distributing goods and services through independently operated businesses that show a common identity to the public. It refers to a business model where a franchisor shares her/his know-how with the franchisee and gives the right to the franchisee to use the franchisor’s distinctive signs (trademark, logo and concept) in exchange of royalties. Through a franchising model, a franchisor can not only commercialize her/his brands by securing regular royalty payments, but can also expand her/his market presence with reduced financial risks. Franchising allows businesses to have an international presence, experience economies of scale and benefit from the growth of business without worrying about the running costs.

4. Assignment: Trademark assignment is the name of the legal instrument that is used to transfer a trademark owner’s rights, title, and interest in a trademark to another party. An assignment can be complete, where the assignor transfers all the rights with respect to the brand, including the right to further license or assign the brand to another entity; or partial where the transfer of ownership is restricted to certain goods or services only and the assignor retains the right to further transfer/license the brand for the remaining goods or services. Further, an assignment can be with goodwill where the assignor transfers the rights in, and the value of, the brand as associated with goods/ services already in use by the assignor. In an assignment with goodwill, the assignee is free to use the brand assigned to her/him for all goods or services, including for the goods or services which were already in use by the assignor.

An assignment can also be without goodwill where the assignor restricts the assignee’s rights in the brand with a condition that the assignee cannot use the brand in relation to the goods or services already in use by the assignor. In other words, the assignor assigns to the assignee the right and entitlement in the brand with respect to goods or services which are not in use by the assignor. Thus, effectively, assignment is a sale of the trademark/brand which transfers the ownership of the trademark/brand from the assignor to the assignee, where the latter is free to exploit the brand depending on the nature of assignment, and the former is paid for the same. The laws pertaining to trademark assignment vary from one jurisdiction to another with differences such as the form an assignment must take, the kind of consideration (if any) that must be expressed, the requirement of an assignment agreement being in writing and/or being notarized, whether the goodwill of a trademark must be transferred or whether a portion of the underlying business must be transferred. Thus, the laws and regulations of each jurisdiction where a trademark exists, should be reviewed before a trademark assignment is undertaken.

5. Mergers & Acquisitions and Joint Ventures: In the process of a merger & acquisition or while entering into joint ventures or other strategic alliances, IP assets, including brands/trademarks, are also transacted. Thus, a lucrative brand/trademark, can also be an extremely valuable asset in such transactions and such brands/trademarks can be commercially exploited in these transactions.

Conclusion

The worth of a brand/trademark lies not only in creating it, but also in exploiting it in a manner that provides maximum commercial benefit to its owner. Trademark licensing, franchising agreements, transferring ownership in trademarks/brands through different kinds of assignment agreements or even increasing the value of one’s goods or services with the use of brands/trademarks, are a few ways in which businesses can commercially exploit their brands. However, before entering any commercial transaction that involves the transfer of rights, limited or unlimited, in a brand, it is essential to assign an accurate value to that brand. Proper valuation of a brand is also essential to determine future benefits of the brand in transactions such as mergers & acquisitions and joint ventures. Thus, valuation and commercialization of brands, are interlinked concepts, in as much as, the purpose of commercialization fails if a brand is not valued fairly. One of the major factors, which affects the success or failure of a business is the degree to which it exploits its IP assets and values it. Businesses with strong and commercially viable IP assets have increased likelihood of succeeding by ways of higher investments and lower chances of bankruptcy.

In the famous words of Steve Forbes “Your brand is the single most important investment you can make in your business”. Thus, it is time for the tools of IP valuation and IP commercialization to receive the importance that they deserve.

Shruhita Amit is a Principal Associate at Sujata Chaudhri IP Attorneys