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Trademarks: The “Good Will” Ambassadors of Your Business
© Cheryl Hodgson 2007 | Posted on November 27, 2007
Many professionals have heard the term “good will,” yet many have very little idea what good will actually is. Others, including business valuation experts and accountants understand that good will is an asset of a business, albeit intangible: it is the positive reputation and relationships that a business has cultivated. Good will has also been legally defined as the “ongoing value of the concern” and also as “the advantage obtained by use of a trademark.”
The law helps a business protect and capitalize on its good will through its trademarks, which serve as symbols for good will. A trademark is a word, symbol, slogan, or even a sound that identifies the source of goods or services in commerce. The mark NIKE® and its famous “swoosh” are both trademarks of the company. When the public sees either one on a shoe, most people assume that they were made by Nike, and meet a certain quality standard. In today’s world, famous brands go beyond serving as indicators of source, they are equated with a life style, a community or a social standing in the world community. In this sense, the trademark can, through proper nurturing, become the good will ambassador of the company – the company’s reputation stands behind its mark—or not!
Intangible assets are similar to tangible ones; the primary difference is nomenclature. For example, owning the trademark (and using it properly!) means that Nike can legally prevent competitors from using its marks, just as an owner of real estate can prevent a squatter from moving in to its domain. Nike can also license (lease) its marks to third parties who wanted to benefit financially from Nike’s reputation on a related product, e.g. sports towels. The towel company would pay a license fee to “rent” Nike’s trademark for use on their products, while extension of the brand from shoes to towels legally resounds to Nike’s benefit, and serves to further build the fame of its marks through greater exposure.
At some point in the life of a business, major life cycle events will intervene. The business may be sold or merged, a major partner may die or withdraw, a divorce will require divestiture or buy out, a venture capital investment, or an initial public offering may be in the cards. From an accounting perspective, good will is an essential element that must be considered in determining the value of a business. The valuation assigned to the good will as an asset of the business in such cases is dependent upon protecting and enhancing its value.
As in the case of any real or tangible personal property, certain prudent rules of acquiring and preserving ownership rights also apply to trademarks and the good will they represent to the world. The business owner must take steps to insure that its good will ambassadors have been properly selected, and are used correctly in advertising and marketing materials. These steps, combined with effective registration strategies and enforcement where needed, can add to the value of the good will as an asset.
Would any prudent person buy a home and overlook recording the deed as soon as possible? Of course, not! However, when it comes to intangible assets, people often forget to register the asset properly in the first place, (the same as owning it without recording the deed), a necessary prerequisite to acquire the same benefits of constructive notice to the world which benefit real property owners. In the U.S. (unlike much of the rest of the world), a trademark owner can acquire some ownership rights in its brand without recording title, just as the car owner does who gets the pink slip but fails to record title to the car with the DMV. But what happens when one of the life events described above comes around? The prospective buyer, or the party entitled to compensation, as part of “due diligence” will want to review the status of ownership of the intangible assets including trademarks. Where there has been no registration, the mark has been used improperly in advertising, or maintenance ignored during the life of the business, the value of the good will, and hence the value of the deal is potentially reduced.
For example, if enough competitors use a confusingly similar term without objection, or a mark is allowed to become generic, or is descriptive in the first place, minimal rights are acquired, or lost completely, and the value of good will is impaired. This potential nightmare situation seems all the worse in cases where a business has spent enormous sums of money in advertising to build its reputation around a mark that, in the end, is fragile and potentially useless.
Sound legal advice from the beginning of the venture to make certain you’ve properly selected and registered your mark is just the beginning. Periodic “tune-ups” are required to maintain good health, including monitoring usage in advertising and marketing, maintaining registrations as required by law, and watching the competitive landscape for possible intruders. This is not only a good idea, but necessary to protect and enhance the overall value of the good will of a business.
A trademark is an inseparable symbol of good will. Hence, determining the value of the marks of a business is also a way of valuating the good will. There are two primary ways that are used to valuate trademarks. One is called the “price-premium” method. This method basically consists of determining how much your trademark helps you in terms of price. For example, Kellogg’s cereal sells for considerably higher than generic grocery store cereal, though most people would agree that they’re virtually indistinguishable. The price difference is the value that the trademark brings “to the table,” and good will can be valued from that perspective.
The other way to think about valuation is to estimate the cost of recreating the existing good will and its corresponding trademark. For example, how much would it cost for Nike to have to use a whole new name and a whole new logo with the same reputation, recognizability, and symbolic value as the existing ones? For anyone who’s still unconvinced that good will and a trademark has significant and substantial economic value, this is the probably the appropriate test – clearly, it would take millions and millions of dollars.
Technorati Tags: business managment, good will, intangible assets, Intellectual Property, Marketing, Sarbanes Oxley, Trademarks
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