As discussed in the first installment of this four-part series, trademarks and trade names are symbols that represent an intangible quality of the good or service provided under the trademark/trade name.  These attributes might include quality, reliability, and/or dependability, and they may be classified generally as reputational. Value for a trademark/trade name arises from its ability to transfer this reputational quality to a product or service.¹ Trademarks and trade names are both components of the brand of a business entity.

The first part of this four-part series set forth an overview of trademark and trade name valuation as it relates to the healthcare industry. The second installment reviewed the economic benefits accruing to the consumers of the trademark or trade name (i.e., patients). This third installment will review the economic benefits accruing to the grantee (licensee) of the trademark or trade name.

Trademarks and trade names hold distinct economic value for each party involved. They reduce information asymmetries for consumers² and bring recognition and “brand loyalty” to the subject enterprise through the perception of quality assurance in the goods and/or services provided by the branded organization.³ Healthcare enterprises have grown their business by licensing the use of their trademarks and trade names to others, i.e., granting permission to a licensee (grantee) to use the trademark(s) and/ or trade names(s) owned by the licensor (grantor). This phenomenon has become common in the healthcare industry, with enterprises such as Mayo Clinic, Cleveland Clinic, and Johns Hopkins using affiliations with various other hospitals and physician practices to expand their reach beyond their Market Service Area (MSA) and across the U.S.

A grantee usually uses a trademark or a trade name to leverage the reputation and goodwill attached to that brand. Trademarks associated with successful and highly advertised products have developed tremendous goodwill with consumers.⁴ It is this goodwill that the grantee can use to their advantage and derive benefit from it. Usually the grantor is a larger entity with greater reach and, in that situation, the grantee can “bask in the reflected glory”⁵ of the grantor by using their trademark or trade name.

To avail themselves of these benefits attached to a trademark or trade name, the grantee agrees to pay a fixed price, i.e., royalty. One technique to estimate this royalty rate is through a comparison of the market for rates for similar transactions. Another technique may be to calculate the royalty rate based on the incremental income attributable to the trademark or trade name. The royalty rate can then be determined by dividing the total sales revenue of the grantee by the incremental earnings attributable to the trademark or trade name.⁶

The incremental earnings attributable to the trademark or trade name are the additional revenue that the grantee will realize from the increase in sales and the higher prices which can be demanded through the use of the trademark or the trade name.⁷

As discussed in Part One of this series, one of the ways a trademark or a trade name may be valued is through the income-based method of incremental earnings. This method may be one of the most relevant methods from the perspective of the grantee as it seeks to quantify the difference between the: (1) earnings of the business enterprise with the use of the trademark or trade name; and, (2) the earnings of the business segment without the use of the trademark or the trade name.⁸ This can be quantified by calculating the difference in earnings between a branded product and an unbranded product, or by building assumptions as to how the business would change after the acquisition of the trademark or trade name and quantifying these changes. Analysts may find it difficult to measure these earnings accurately as it is difficult to predict the precise impact of a trademark or trade name on the operation of a business; additionally, the healthcare industry lacks generic products to which a brand can be compared, unlike industries such as food or retail goods.

Due to the lack of accurate information to predict incremental earnings by the use of a trademark or trade name, the analyst often relies on the relief from royalty method under the market-based approach. A market or income-derived royalty rate may be applied to the future cash flows of a business entity or business segment and the projected cash flows can be discounted to their present value equivalent at an appropriate risk adjusted required rate of return to arrive at an indication of value for the incremental economic benefit generated by the use of a trademark or trade name.⁹ The relief from royalty method is an attempt, through normative industry market data, to quantify the expected increase in revenues and profits that will accrue to a grantee due to their use of the acquired trademark or trade name.

The risks to the grantee in the acquisition of a trademark or trade name include the risk that the procured goodwill might fail to generate the projected increases in revenues and profits that supported the selected royalty rate. In addition, the grantee also exposes themselves to the risks arising from any future public relations embarrassments that the brand might suffer from the use of the trademark or trade name by the grantor or other grantees, such as a large case brought by the government for fraud and abuse, or a HIPAA (Health Insurance Portability and Accountability Act of 1996) violation, that would have a negative impact on the perception by consumers of the grantee’s business.

Part Four of this four part-series will specifically focus on the economic benefits accruing to the trademark or trade name grantor.