Mercer Capital's Financial Reporting Blog

A Game of Names: Licensing and Tradename Valuation

Reaching average audiences of 18.4 million per episode, “Game of Thrones” is the most successful show in HBO’s history. The show’s vast popularity has boosted HBO’s licensing revenue and HBO holds more than sixty different licenses, including for brands of beer, jewelry, and cosmetics. HBO has also made moves to protect the integrity of its licensed products, sending cease-and-desist letters to manufacturers of unlicensed products. The success of both the show and HBO’s ability to capitalize on licensing opportunities leads to interesting observations about the techniques used to value tradenames and licensing rights, both valuable forms of intellectual property.

Valuing a tradename (either for a company or a product) is typically accomplished using the relief from royalty method. The relief from royalty method requires an estimate of the expected future revenue arising from the tradename and the period over which the tradename will be used. The appraiser then determines an appropriate royalty rate to apply to the revenue stream, usually based on what a market participant would pay to license a similar tradename. Market data can be found in SEC filings and legal documents, and are often aggregated into databases by various service providers. The final step is determining an appropriate discount rate to apply to the stream of cash flows expected to be derived from the subject tradename.

Valuing licensing rights requires a different process. While a tradename contributes directly to the generation of projected revenue, licensing often results in entirely new lines of revenue being opened up for the licensor. Determining the value of license rights associated with a certain name (such as “Game of Thrones”) requires an analysis of any potential or likely licensing opportunities. Valuing licensing opportunities requires similar estimates of future revenue, and the value of the licensing agreements would be the discounted expected royalty payments on this future revenue stream. However, several of the assumptions in this calculation might be based on characteristics of the potential licensees and alternative sales channels, rather than the licensor’s existing market. Additionally, royalty rates may vary depending on the market standards in the industries of the licensed products.

Mercer Capital has deep experience valuing tradenames and other forms of intellectual property. Contact a Mercer Capital professional today to discuss your valuation needs in confidence.

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Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at @MercerFairValue.