What it means
The purpose of a trademark is to prevent confusion in the marketplace. Customers use brand signs as a shortcut for quality and origin, and the law protects that shortcut by giving the owner a monopoly over the sign within defined classes of goods and services.
Registration is territorial and category-specific. A trademark registered for software in one country protects nothing in another country and nothing in an unrelated class such as clothing, which is why growing businesses file in each market and class they actually trade in.
In accounting terms, a trademark is an intangible asset, but only in limited circumstances does it reach the balance sheet. Registration and legal fees paid to acquire or defend a trademark can be capitalised, while the marketing spend that made the brand valuable is expensed as it is incurred.
That creates a familiar gap between book value and economic value. A brand that would sell for millions may appear in the accounts at the few thousand dollars of filing costs, and the difference only becomes visible when the business is acquired and the value is recognised as an intangible asset or goodwill.
Where trademarks do need valuing, the most common approach is relief from royalty, which asks what the business would have to pay to license the mark if it did not own it. Trademarks are also often treated as having indefinite useful lives, meaning they are tested for impairment each year rather than amortised on a schedule.
In practice
Real-world examples
Example 1
A craft brewery registers its name and label design in three classes covering beer, glassware and hospitality services. When a bar chain later opens using a near-identical name, the registration lets the brewery stop it without proving any actual loss of sales.
Example 2
A software company files trademarks in the United States and the European Union but not in Australia, where a local firm registers the same name first. Entering that market later costs the company a rebrand plus a negotiated settlement.
Example 3
An acquirer buying a household cleaning brand allocates $1,800,000 of the purchase price to the trademark and the balance to goodwill. Because the mark is judged to have an indefinite life, it is tested for impairment annually rather than amortised.
Think of it
A trademark is like putting a branded fence around your intellectual property. It clearly marks your territory so nobody else can sell goods using your family name or flag.
Formula
Calculation
Relief from Royalty Value = (Revenue x Royalty Rate) x (1 - Tax Rate) / Discount Rate
A speciality food brand generates $8,000,000 of annual revenue. Comparable licensing deals in the sector carry a royalty rate of 3%, the tax rate is 25%, and the valuer uses a 10% discount rate for a stable, mature brand.
Step 1: Notional royalty = $8,000,000 x 3% = $240,000 a year
Step 2: After tax = $240,000 x (1 - 0.25) = $180,000 a year
Step 3: Capitalised value = $180,000 / 0.10 = $1,800,000
The trademark is worth roughly $1,800,000 on this basis. Note that the same brand may sit in the accounts at only $14,000 of registration and legal costs, so the $1,786,000 difference reflects value the accounting rules deliberately decline to recognise until a transaction proves it.Case study
Seen in the real world
This is a fictional illustration. Marlowe Preserves, an invented jam and chutney producer, traded for eleven years under a distinctive name and hand-drawn label without ever registering either. Its accounts showed no intangible assets whatsoever.
A larger food group approached with an acquisition offer and its lawyers found the gap immediately. Without a registration, Marlowe could not demonstrate exclusive rights, and a supermarket own-label product was already using a strikingly similar illustration on its packaging.
The illustrative outcome was a deal that completed at a materially lower price than first indicated, with part of the consideration deferred until registrations were granted. Had Marlowe spent a few thousand dollars on filings years earlier, the buyer's valuers would have had a clean $1,800,000 intangible to point at instead of an argument.
Watch out
Common mistakes
- Believing that registering a company name creates trademark rights. Company registration and trademark registration are separate systems, and one gives no protection under the other.
- Filing in only one class to save money. Protection is limited to the classes registered, so a competitor can lawfully use the same name on adjacent products.
- Capitalising brand advertising as part of the trademark's carrying value. Marketing spend that builds brand awareness must be expensed as incurred, however clearly it increases the brand's worth.
Questions
People also ask
How long does a trademark last?
Registration typically runs for ten years and can be renewed indefinitely, provided the mark continues to be used in trade.
Why do internally created brands not appear on the balance sheet?
Accounting standards prohibit recognising internally generated brands because their cost cannot be measured separately from the cost of developing the business as a whole.
What is the difference between a trademark and a trade secret?
A trademark protects a public-facing sign and depends on registration and use, while a trade secret protects confidential information and depends entirely on it staying hidden.