When a company acquire [or purchases] a brand from another company, it can be as simple as the transfer of the name, or it can be a more comprehensive transfer of all the factories and personnel who manufacture products under that brand name. More frequently, the acquisition covers the entire corporate division that operates under the brand name. The analyses needed to review a brand name are relatively simple from the financial perspective, though somewhat more involved from the legal side, because one must conduct research to ensure that there is a clear title to the trademark, as well as ascertain the extent of possible infringements on the brand name and the extent and recent history of litigation needed to support the brand.
In an acquisition or merger process, a controller is not only called for purely financial and or accounting analysis [i.e. Profitability, Asset and liabilities analysis], but he/she is called for anything-analyses to make sure the acquisition will create sufficient ROI level for the company in the current and future time, including risk and legal analysis. Brand is an intangible asset. Sure it is a must item to be analyze, and a controller expected to be able to provide and deliver brand analysis to the management [of the acquirer]. The primary analyses are consisted of at least 5 steps which are briefly listed and discussed below. At the bottom of this post, you will find example of analysis report for brand acquisition. Follow on…
Step-1. Determine The Amount Of Annual Trademark Fees
This is a very minor item, but can grow to considerable proportions if the trademark is being maintained worldwide, which requires filings and maintenance fees in a multitude of jurisdictions.
Step-2. Determine Clear Title To The Brand Name
This is not just a matter of paying for a small amount of research by a legal firm to determine the existence of any countervailing trademarks, but also requires a search in multiple jurisdictions if the buying company wants to expand the brand to other countries.
Step-3. Ascertain The Amount Of Any Current Cash Inflows From The Brand Name
This is a very difficult item to determine, because very few companies establish a brand name and then charge licensing fees for the use of it. A more common approach by far is to build all products sold under the brand name, so that there is tighter control over quality. However, it is nearly impossible to determine the incremental cash inflow that is specifically due to the brand name itself and not just product sales. The two best analysis options here are to either measure just that portion of sales that are specifically due to licensing agreements (and therefore easily traceable) or to measure the incremental difference in cash flows from all products under the brand name, in comparison to those of the industry average or specific competitors.
Step-4. Note The Amount Of Any Legal Fees Needed To Stop Encroachment
A quality brand frequently attracts a number of companies, either in the country or abroad, that build inexpensive knockoffs and illegally sell them for vastly reduced prices. Given the reduced quality and prices, the net impact of these fake goods is to cheapen the brand’s image. Consequently, constant legal pursuit of these companies is the only way to keep knockoff products off the market. The controller should estimate the cost of current lawsuits, roughly estimated by reviewing all current lawsuits that are public record, or by asking the target company. If the acquiring company wants to maintain the brand image, it must be willing to continue to use legal alternatives, so the current legal cost can be used as a reasonable benchmark of future costs as well.
Step-5. Note Any Challenges To Use Of The Brand Name
Yet another legal issue is that there may be lawsuits pending that claim the trademark of another person or corporation supersedes the one about to be purchased. If so, a search of all open lawsuits should reveal this information. Once again, if the company contemplates worldwide usage of the brand name, then a much more extensive search for competing trademarks in other locations is necessary. If there are cases in which someone else has filed for the right to use the brand name in another country, then the controller should calculate the estimated cost of acquiring the rights to that name.
Analysis Report for Brand Acquisition
From the above 5 steps, clearly, there is little in the way of financial analysis and a great deal of legal analysis required before purchasing a brand name. Nonetheless, the controller must be involved, because of the cost of the legal searches. In below exhibit, I itemize the financial analysis associated with a brand name acquisition that you should expect to issue to management.
Note: A competing trademark has already been filed by company XYZ in all countries of the European Community and Japan. The cost required to purchase this trademark is included in the analysis.
Because virtually all of the costs associated with the acquisition [purchase] of a brand name involve the legal department, the controller can expect to work closely with this group in determining the costs of each line item noted above.