When it comes to structuring a successful M&A transaction, existing trademarks play an important role for both parties involved. Valuing trademark and creating a strategic vision for them can lead to success down the line. Click “Full Article” for details about the importance of trademark due diligence.
When companies merge in the 21st Century, it is often to add value through intellectual capital rather than adding additional office space or factories. This is due to the fact that, increasingly, intellectual assets can be worth more than fixed assets when it comes to a company’s value.
Consequently, it is no surprise that valuing intellectual property has become an increasingly important part of due diligence in mergers and acquisitions. And devising a strategy for existing and future trademark integration is an important task for both parties of a potential merger or acquisition.
Some trademarks carry more weight than others. Generally, trademarks that are widely commercialized hold the most value. Valuing a trademark can be a somewhat subjective process although there are a few methodologies that tend to be used, including:
1. Market Valuation, where the value of the trademark is assessed through comparisons of sales of similar assets between competitive companies.
2. Income Valuation, which bases the worth of the trademark upon the future income it is expected to generate.
3. Cost Valuation, which is determined by assessing the costs associated with creating and maintaining the trademark.
Assessing Rights and Infringements
Many trademark assessments are not definitive black-and-white situations with regard to trademark rights. As such, due diligence must involve a thorough assessment of the trademark rights of both companies involved in a potential merger or acquisition. Just as the value of some trademarks is higher than others, trademark rights may be stronger or weaker depending upon a number of circumstances that may weaken the value or power of a trademark.
A trademark search is generally conducted to determine if any third parties have rights to the trademark. In addition to third parties potentially having an outright right to use a trademark, third parties may also acquire licensed rights, which may expire after a period of time. Both of these scenarios, however, have the potential to lower the value of the trademark and may restrict the rights an acquiring company might have with regard to utilizing the trademark.
Other potential red flags with regard to value include third parties infringing upon a trademark. Companies must be vigilant with regard to third parties infringing upon trademark rights. How successful a firm has been in ‘policing’ such infringements impacts the value of the trademark. Additionally, an acquiring company, for example, must calculate the ongoing costs of continuing to be vigilant with regard to trademark infringement when doing due diligence.
Another intellectual property issue to consider when doing due diligence with regard to trademarks is an international trademark assessment. If an acquiring company, for example, plans to expand a product market abroad, an extensive search must be done to determine if the product can be trademarked in those offshore markets. If the company set to be acquired, in this example, has not registered the trademark in the countries targeted for possible expansion, the process for doing so and the availability of that particular trademark must be investigated thoroughly. If, however, the company has planned ahead by laying the groundwork for offshore expansion, this factor increases the value of the trademark.
Finalizing a Trademark Strategy
Once the trademarks for both companies have been valued, a post-merger or acquisition brand strategy is often established. This is an important step in the due diligence process that, if overlooked, may cause integration problems down the line. Trademarks play an important role in brand strategy and it is vital to establish a vision with regard to which trademarks will survive past the post-merger or acquisition phase.
The valuation of the respective trademarks often affects the decisions about which trademarks should be chosen to survive. Those with the highest value tend to be the ones that are carried forward in the newly formed company. A detailed plan, however, is still established that specifically lays out how these trademarks will be utilized with regard to brand strategy.
Often, in determining a brand strategy for the future, new slogans and logos are also established. Brainstorming this path early in a merger or acquisition deal process gives both sides of the table a firmer set of expectations for the future.
All is Well that Ends Well. While there are no guarantees when it comes to M&A deals, placing a high importance upon intellectual property due diligence — in general — and trademarks, specifically, may bode well for a successful transaction down the line.
Contact your WFY tax advisor here for more information.