Mexico: Valuation Of Trademarks In Mexico

It is not uncommon that a Company engaging in business in a foreign country, in our specific case, a foreign company seeking the valuation of a trademark, has to rely on its local counsel to obtain answers to questions, such as; how to proceed? what needs to be valuated? or how to conduct such valuation?.

Under such assumption, in Mexico, as in any other country of the world, valuation of trademarks and intangibles in general, is playing a key role within the Corporate arena. Brands have become and are recognized, more and more today, as valuable assets for any firm. Although, in Mexico the value of a trademark is seldomly included in the financial and accounting reports of a company, the recognition as a valuable asset is undisputed, obliging accounting practices to include the value of trademarks and intangibles within the balance sheets and financial reports of the Companies.

The actual value of a brand is required to engage and accurately complete certain corporate transactions. In Mexico, there are a number of corporate and financial transactions that will require the valuation of a brand. Among the most frequent of these transactions are; Balance Sheet Recognition (will provide a more accurate report in the Company’s Annual Report); Securitised Borrowing (will help lenders determine the amount to lend by accurately establishing the value of the collateral asset); Licensing and Franchising (will help determine the percentage of royalties that can be collected); Mergers and Acquisitions (will help determine the real value of the assets acquired or of the assets of the merged firm); Litigation (may help assess the amount of financial losses or damages derived from unlawful use); Investor Relations (will help to explain shareholders the value of a Company’s share prices); Fiscal Planning and Strategies (can help Financial and Fiscal advisors to determine the inclusion of intangible assets within their future fiscal strategies); Marketing Budget Allocation (can provide hard data for establishing annual advertising budgets); Internal Marketing Management (will help determine the success of the different brand strategies within a company); Trademark Portfolio Review (will help establish the actual value of a Firm’s Trademark Portfolio or even of the complete Intellectual Property portfolio); Internal Communications (can help explain management within a Company of the behavior of any given brand); External Investor Relations (will help to provide accurate and hard data to those external Investors that may be interested in investing in any given Company); Fair Trading Investigations (may help prove that a brand has no relevant market power thus not incurring in an unfair competition conduct); Advertising Agency Performance Evaluation (by assessing the value of a trademark it may help management to determine the performance of a specific Advertisement Agency); Joint Venture Negotiations (will help the parties to establish the terms and conditions if one of them is contributing a brand) and Tax Purposes (will help to establish the royalty that can be legally collected under a tax perspective and the amount in taxes owed).

For valuation purposes, we can divide the aforementioned transactions into two groups; a) The valuation of a trademark with no external consequences or solely for the company’s internal purposes, and b) The valuation of a brand with external consequences.

As for the first purpose of valuation, i.e. for internal purposes, this valuation will have no effect outside the Company and will be performed for activities such as Internal Marketing Management, Marketing Budget Allocation, Internal Communications and Trademark Portfolio Review. This motive for valuation can be performed by an internal or external agent using any general accepted method of valuation.

Referring to the valuation of a brand with external consequences, we can include those transactions that will have an effect outside the firm’s internal business. This rationale for valuation will include transactions such as Securitised Borrowing, Litigation, External Investor Relations, Investor Relations, Licensing and Franchising, Mergers and Acquisitions, Joint Venture Negotiations, Tax purposes and Fiscal Planning and Strategies.

For example, if a company wishes to engage in any of the aforementioned transactions and since these transactions will not only affect the company’s internal business but its relationship with third parties and will have outside consequences such as the payment of taxes, the valuation must be conducted by a legally authorized appraiser. This legally authorized person will be deemed as an expert Appraiser under law and will be invested of "public faith" in commercial dealings, being these appraisals legally binding. Moreover, it will be necessary that the valuation of the intangible assets is performed, not only complying with the generally accepted accounting principles and the good corporate governance principles but also with Mexican law and regulations

This law-granted expert appraiser called "Corredor Publico" or "Commercial Notary" may rely in any of the generally accepted valuation methods, such as:

  • Cost based valuation.- This method relies on the basis of the actual cost to create the brand or the cost it would have to recreate it.
  • Market based valuations.- This method is based on the comparison made between two competitive brands.
  • Royalty Relief Method.- This method is based under the assumption of licensing a trademark from a third party owning a brand and the cost this license will have derived from the payment of royalties. On the contrary, this method measures estimated future sales with a royalty rate that may be collected from licensees.
  • Economic Use method.- The most widely used method of valuation which considers the economic value of a brand to its owner by its current use.

Any of the above methods of valuation will comprise four key elements, that the expert Appraiser will rely on:

  • Market Analysis.- This analysis will give the individual performing the appraisal understanding pertaining to the market and the competitive conditions thereof.
  • Brand financial analysis.- This analysis will identify the branded business earnings.
  • Driver analysis.- Will determine what proportion of the business earnings is attributable to the brand.
  • Brand Risk Analysis.- This will determine the position of the brand with consumers and with end-consumers.

Another widely recognized method of valuation accepted in Mexico, was developed by Interbrand®, a company that not only offers the valuation of a specific brand but also annually publishes, in cooperation with Business Week® magazine, "The World’s Most Valuable Brands" survey. Their model calculates the brand value as the net present value of the earnings of a brand as expected to generate in the future. Its model comprises four specific key elements:

  • Financial Forecasting.- The forecast will include projections of revenues expected to generate in the future by the specific brand. From the revenues it deducts operating costs, corporation tax and an amount for the capital employed required to operate the branded businesses.
  • Role of Branding.- This element determines intangible earnings that are attributable solely to the brand and identifies and calculates the customer demand and their dependency on the brand.
  • Brand Strength.- This analysis assesses the risk profile of the projected brand earning based on the position of the brand. The brand strength is measured using seven key attributes including Market, Stability, Leadership, Support, Trends, Geography and Protection.
  • Brand Value Calculation.- The value of a brand can depend on a good financial performance and a strong marketing position, thus even if there are short-term weak financial performances a strong brand, in a long term, can result in a high valued mark.

Although, the expert appraiser in Mexico can use any of the aforementioned traditional and generally accepted methods of valuation, it must follow certain guidelines and regulations established by different Mexican laws such as the Commercial Code, the Federal Fiscal Code, the Federal Law of Commercial Notaries "Ley Federal de Correduria Publica" and specifically by the "Agreement that establishes the Guidelines for the Valuation of Assets". The Agreement was issued by the Executive Branch through the Secretary of Economy and although it does not have the supremacy of a federal law its applicability is on a federal level. This Agreement completes the regulations of the Federal Law of Commercial Notaries "Ley Federal de Correduria Publica", in connection with appraisal issues.

The "Agreement that establishes the Guidelines for the Valuation of Assets" establishes, the different elements and methodology that the legally-appointed-expert-Appraiser must follow in reference to the valuation of different assets. In this particular case and due to the importance of this document, we will literally transcribe those specific guidelines referring to intangible assets and thus trademarks. The Agreement was published in March 9, 1999 in the Official Gazette of the Federation and includes in connection to intangible assets, the following provisions:

"Article 12.- In appraisals performed on intangible assets, in attention to its type or nature thereof, the value may be determined considering the following:

I. Through market research of similar goods or products based in commercial references, implied and calculated values, considering sales volumes and profitability, possible cases of acquisitions, or in absence thereof, considering royalty payments for the use and exploitation of patents, trademarks and franchises.

II. In case of projects, the analysis will include the infrastructure of services, commercialization characteristics, technology applied, price fixing, investment costs, lucrum cessans, financial behavior, thus to reach a diagnosis of investment margins, cash flow, and balance points.

…"

Although the above guidelines are compulsory and provide specific criteria that must be followed by the Appraiser, it is evident that, depending on the method of valuation used, the results of the value of a trademark may vary.

Another hypothesis regulated by Mexican Law, specifically by the Federal Fiscal Code, is related with the acquisitions of trademarks. Under this hypothesis, the Federal Fiscal Code establishes that any Taxpayer or Authority thereof, may request an appraisal performed by a "Corredor Publico" (as explained above) or by a Financial Institution duly authorized by the Fiscal Authorities. This provision is highly relevant since it establishes the obligation of amending the transaction price when the appraisal value varies in more than ten percent from the actual transaction price established as consideration of the asset transfer. Under this assumption, the transaction amount will need to be corrected and the difference resulting thereof will be added to the original transaction amount in order to determine the taxable amount.

It is clear that Mexican Law and practice concerning brand valuation grants the Appraiser some liberty of action, like that of deciding the method of valuation to be used. Notwithstanding, it is also clear that when the appraisal will have the aforementioned "external consequences", the Appraiser must be legally authorized to render the valuation report and that must follow certain specific guidelines despite the method of valuation chose for the specific case. Moreover and from the guidelines recited, it can be inferred that Mexican Law adopts, in certain aspects, the Economic Value method perspective mixed, again in some aspects, with the Market based valuation method.

Considering the above, in order to proceed with a brand valuation in Mexico, it is essential to determine the specific purpose for such valuation, i.e. if it will have internal or external consequences as mentioned above. In this last scenario, it is imperative that the valuation is performed by a legally authorized person, in order to fully comply with the provisions and regulations of the Commercial Code, the Federal Fiscal Code, the Federal Law of Commercial Notaries "Ley Federal de Correduria Publica" and specifically the provisions of the "Agreement that establishes the Guidelines for the Valuation of Assets".

© 2006 Ignacio Dominguez Torrado

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