A trademark is a word, symbol, slogan, or even a sound that identifies the source of goods or services in commerce. Nike, for example, and its iconic “swoosh” symbol are both trademarks of the company and instantly recognizable. When the public sees either one on a shoe, people know that they were made by Nike and meet a certain quality standard. In today’s world, famous brands go beyond serving as indicators of the source. They are equated with a lifestyle, a community or a social standing in the world community. In this sense, the trademark can, through proper nurturing, become the goodwill ambassador of the company.
While many business people have heard the term “goodwill,” some have very little idea what goodwill actually is. Others, including business valuation experts and accountants, understand that goodwill is an asset of a business, albeit intangible: it is the positive reputation and relationships that a business has cultivated. Goodwill has also been legally defined as the “ongoing value of the concern” and also as “the advantage obtained by use of a trademark.”
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 into 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, for example, towels. The towel company would pay a license fee to “rent” Nike’s trademark for use on their products. The 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.
From an accounting perspective, goodwill is an essential element that must be considered in determining the value of a business. The valuation assigned to the goodwill as an asset of the business in such cases is dependent upon protecting and enhancing its value. 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 goodwill 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.
Determining the value of the marks of a business is also a way of valuating the goodwill.
There are two primary ways that are used to evaluate trademarks. One is called the “price-premium” method, which consists of determining how much your trademark helps you in terms of price. The price difference is the value that the trademark brings to the table, and goodwill can be valued from that perspective. The other way to think about valuation is to estimate the cost of recreating the existing goodwill and its corresponding trademark.
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 goodwill they represent to the world. The business owner must take steps to insure that its goodwill 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 goodwill as an asset.