The concept of ‘Brand Value’ is now well established and in some parts of the world (e.g.: UK, France, Australia, Sweden) and accounting regulations allow brands to be recognised as intangible assets on company balance sheets. 

Although the number for multi-million pound acquisitions taking place has lessened somewhat, and English accountants are still debating the rights and wrongs of balance sheet recognition, one thing is clear : that Brands do comprise a significant element of business value and that this is now accepted by analysts, shareholders, company boards, bankers and key regulatory authorities (not least the London Stock Exchange and the Monoplies and Mergers Commission). For many businesses the brand element is often more important than the tangible assets that have traditionally been regarded as the core value of a company. 

One field in which brand valuation and the concept of brand value is beginning to have an impact is in the area of trade mark licensing. In recent years there has been a marked increase in the attention given to the licensing of trade marks as well as other intellectual property such as copyrights, patents and designs. 

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 were sometimes 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 fact that brands have significant value and that their licensing cannot be regarded as a mere formality. 

One of the major impacts of this is, 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 place.  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 more valuable.  For example, licensees will often now participate with the brand owner in the development of global advertising campaigns and the design of visual identity programme.  It is only in this way that the integrity, and thus the value, of a brand can be safeguarded. 

But trade mark 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 licenses back to the English company.  This has a number of implications: 

• Use of brands in controlled centrally and directed to the benefit of the whole group and not just of a subsidiary.
• The maintenance of brand rights - such as registering and renewing of trade mark registrations, policing, prosecuting infringement and passing-off actions - is co-ordinated and carried out consistently across the world rather than being left to the interests or abilities of local management.
• The licensing of brands, and the charging of brand royalties, rescues brands from the closed world of the marketing department and makes their value the responsibility of financial and legal departments also. 
• International brands, whose marketing may be shared by more than one company within a group or even by more than one division, are centrally co-ordinated to ensure maximum coherence in terms of brand image, product development, advertising, etc. (e.g. Philip Morris’ management of the Marlboro brand).
• Brands can more easily be extended into new areas and licensed to other subsidiaries while firm control is still kept on the integrity of brand equity (e.g. Nestlé’s extension of the Aero brand through Chambourcy).
• Operating companies are made aware that the brands they use are as much a shared resource, and a property of common value as, say, research laboratories, recipes and patents.
• Country managers can be made responsible for the local maintenance and development of a global brand.  Their contribution to brand value is after all a contribution to shareholder value and should be rewarded accordingly.
• Internal licenses, whether within the home country or overseas, increasingly incorporate the payment of a royalty which reflects the true value of the asset being used rather than just being a nominal amount to ‘cover administration’. Making a financial charge for the use of a trade mark (or other intellectual property) focuses the user on the value of the asset and the need both to protect and exploit that value.
• The royalties received from licenses to overseas subsidiaries can be used to repatriate funds in return for the use of a genuine piece of property.  This can have major fiscal implications.
• New licenses negotiated within the group, with joint venture partners and outside the group, can be place in a context of genuine brand licensing and realistic royalty rates giving the opportunity to negotiate much higher returns for the use of brands than has been the case commonly in the past.

Brand valuation has made a critical contribution in all these areas by raising awareness of the concept of brand value’ and in putting a monetary value to a brand.   It also helps to communicate to the outside world that the company takes its brands seriously. 

One aspect mentioned above is the fiscal implication of charging overseas subsidiaries and third-party licensees a proper rental for the use of brands.  Inspite of the value attached to a brand, many companies have yet to realise that the royalty rates they demand are far too small for the value of the trade mark asset being licensed.  Increasing the royalty rate demanded not only has managerial benefits but also transfer pricing advantages.  And when arguments are put forward to tax authorities to justify increasing royalty rates they lack the financial robustness of a valuation of the asset. Instead tax authorities bring the argument back to comparability with other royalty rates and, of course, it is the tax authorities themselves who have the best information on what comparable rates are being charged. 

This imbalance of power could, we believe, be greatly improved in two ways: 

• 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.