What it means
Customers often choose a service because of the name behind it. A service mark protects that name or logo so that no rival can use something confusingly similar in the same market.
In practice, the two terms are often used together, and many countries treat service marks and trademarks under the same legal system. Rights can arise from use alone, but registration with the national trademark office gives much stronger protection.
It also makes the right easier to enforce, to license and to sell. Registration usually needs renewing at set intervals, and a mark that stops being used can be lost.
From a finance point of view, a service mark is an intangible asset (something of value that has no physical form). If a business buys a mark from someone else, or acquires it as part of buying a company, it is recorded as an asset at its cost or fair value.
A mark developed internally is usually not shown on the balance sheet, because the costs of building a brand are expensed as they are incurred. Valuation is commonly done with the relief-from-royalty method, which asks what the owner would have to pay in royalties to licence the mark if it did not own it.
The mark is worth the present value of those saved payments. Other approaches look at the price premium the brand commands or at the cost of recreating it.
The nuance is that a mark is only as strong as it is distinctive and defended. A generic phrase may not be protectable at all, and a mark that the owner fails to police can drift into general use and lose value.
In practice
Real-world examples.
Example
A regional accounting firm registers its name and logo as a service mark before opening offices in a second city. When a competitor begins using a nearly identical name, the firm sends a formal notice that cites its registration.
Example
A software company acquires a smaller rival and, in the purchase price allocation, assigns $900,000 to the rival's service mark. The finance team records it as an intangible asset and reviews it each year for impairment.
Example
A franchise chain of dental clinics licenses its service mark to franchisees in return for a royalty of 5% of clinic revenue. The royalty becomes a predictable income stream for the franchisor and funds ongoing brand marketing.
Formula
Calculation
Relief-from-royalty value = after-tax royalty savings / capitalisation rate
After-tax royalty savings = revenue x royalty rate x (1 - tax rate)
Suppose a consulting firm earns $2,000,000 a year in revenue under its service mark, and a comparable licence would cost 3% of revenue. The royalty saved is 2,000,000 x 0.03 = $60,000. At a 25% tax rate, the after-tax saving is 60,000 x (1 - 0.25) = $45,000. If the capitalisation rate is 10% and the income is assumed to stay flat, the value is 45,000 / 0.10 = $450,000. This is a simplified estimate, since real valuations also model growth and the finite life of the mark.Case study
Seen in the real world.
Northgate Courier Services is an illustrative, fictional delivery business that grew from three vans to a regional network under one orange logo and a catchphrase. A rival launched a similar logo in a neighbouring town and began winning corporate contracts.
Because Northgate had never registered its mark, its lawyers advised that the claim would be slower and more expensive than it should have been. The company registered the mark, filed an objection, and in the meantime tracked the lost contracts to estimate the damage.
The illustrative lesson was that brand value had been building on the balance sheet's blind side for years. Once the mark was registered and valued, the board could see its worth, protect it, and consider licensing it to partners.
Watch out
Common mistakes.
- Assuming a service mark is different from a trademark in a way that matters commercially, when the legal protection is very similar.
- Believing that a registered company name automatically gives rights over the name as a brand, when company registration and mark registration are separate.
- Recording the cost of building a brand as an asset, when internally generated brand costs are generally expensed.
Questions
People also ask.
What is the difference between a service mark and a trademark?
A service mark identifies a service, while a trademark identifies physical goods, but both protect brand identity in the market.
How long does a service mark last?
Registration usually lasts for a set term and can be renewed repeatedly, as long as the mark is still in use and the fees are paid.
Can a service mark be sold or licensed?
Yes, the owner can assign it to another business or licence it in return for royalties, which is common in franchising.
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