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Value and Values
BY Joel I. Rosenblatt

To be clear, this month I am writing about “value,” as in the dollar value of a trademark or service mark, and not in “values,” as an opinion of whose values, as modified by a favorite race, religion, creed, or national origin, are better. The difference, between value and values is in the facts and reasons necessarily supporting the dollar value. For values, it’s all in the opinions.

The final word on dollar value is what a willing buyer will pay a willing seller in an arm’s length transaction. The “arm’s length,” means no collusion tainting the value. Where there is a value defining sale, in case of a sale of a business, including as a trademark or service mark, the mark’s value must be determined, before buyer and seller each can go about their respective business.

For the seller, the value includes an amount for the tangible equipment, after depreciation and the consumables, usually valued as cost. The sellers profit will be the value of the business, as measured by the selling price, after deduction of the depreciated tangible equipment, the cost of the consumables, and the (very important), cost of the trademark or service mark. Here is where life gets complicated. Where trademarks are involved, an understanding of the goodwill as an asset of an ongoing business is required.

Goodwill is used in a trademark or service mark sense with one meaning -- the intangible value of the business above the value of the business tangible and intangible assets. Viewed most conveniently, it is a catchall for any balance of the selling price above the countable value of the other business tangibles and intangibles.

In terms of tax consequences, the appreciated value of the goodwill reflected in the selling price over and beyond the goodwill value in the price paid by the seller when the business was previously purchased, is taxable profit. For the new buyer, the goodwill, namely the excess of the price paid after deducting the value of the other tangible and intangible assets, is a depreciating asset. As a depreciating asset, the goodwill may be used as any other depreciating asset as a deduction against revenue.

While it all appears easy to understand, lets consider what the law says about trademarks/service marks, in connection with a business and in particular with the goodwill of a business. A fair warning: this legal view is counter intuitive to what anyone would expect to have been taught in a reputable business school.
The federal trademark act, known as the Lanham Act, requires that a trademark may be assigned only with the goodwill of the business in which the mark is used, or with that part of the goodwill of the business connected with the use of and symbolized by the mark. When selling a business, the agreement may state a conveyance or transfer to the buyer of all rights, titles, and interests, to, or in the mark and to business connected with the use and symbolized by the mark. The reason for this wording is twofold.

First, any business is more than the countable assets it holds, tangible or intangible. Take a bank for example. Consider a federally chartered bank, with assets at the Federal Reserve, one or more buildings and with personnel and equipment ready to take deposits and extend loans. Without a name, the bank is a shell and has no recognition in the marketplace of consumers looking for banking services. Now place a sign on our fictionalized bank naming the bank “Citicorp,” and the bank is in “business.” The business is the business of banking under the service mark “Citicorp.”

As our bank does banking business, the experience or goodwill of the bank’s customers, good or bad, will now become associated with the business of the bank, as symbolized by, and known to the consumers of banking services as, the mark “Citicorp.” A few points about goodwill may help.

A mere transfer of the countable tangible and intangible assets of our new “Citicorp,” bank, for example, the building, equipment, manuals, proprietary systems, and even know how (meaning the knowledge in, and techniques or procedures used for, the operation of a depositary and lending business), without the transfer of the “Citcorp,” mark and the goodwill symbolized by the mark, will not transfer the goodwill that goes with service mark “Citicorp,” and therefore will not transfer the service mark “Citicorp.” The reason would appear obvious. Remove the name “Citicorp,” from the building. A customer standing in front of the bank will have no idea of who is running the bank or quality of service expected, because any means for identifying our now nameless bank with the previous “Citicorp,” operation is gone as is the “Citicorp,” business and goodwill associated with that bank.

To emphasize the point, turn the facts around. What if “Citicorp,” bank assigned its service mark “Citicorp,” “with the goodwill of the business in which the mark is used, or with that part of the goodwill of the business connected with the use of and symbolized by the mark,” but nothing else was transferred to the buyer. That means the buyer takes only the service mark with the goodwill “Citicorp,” has built with its banking customers. At some point the buyer will have to put up the brick and mortar and employ a staff, required for banking operations. However, it is only when our buyer places the mark “Citicorp,” on its building that banking customers recognize that what’s inside, namely the equipment, the affiliation with the Federal Reserve, and the style and method of operation, is the “Citicorp,” business and the “Citicorp,” goodwill. That means to effectively receive a transfer of the goodwill built by “Citicorp,” the buyer will be required, at least for a time, to deliver a service which is substantially similar to the Citicorp standard of service as it was provided to its customers by the seller of the “Citicorp,” service mark. Here then, is an example of a service mark transfer without any of the assets or know how or style or procedures, used by the seller.

I think the concept was well put by our own Florida 5th District Court of Appeals, in a case involving business value. In the view of the Court, goodwill is the shown or demonstrated by the businesses general public patronage, reflected by its increase in profits beyond any profits expected from the mere use of capital.
Lawyers know better than to ask, judge, even at the appellate level, what was meant by the judges carefully chosen word used in an opinion. That is a task of understanding, sometimes called interpretation we lawyers willingly do for our clients. By “mere use of capital,” I think the Court was referring to the price paid for a business after deducting the value of the business’s tangibles and intangible assets. That would appear to be the only rational way to recognize the service mark’s value symbolizing the customer’s goodwill toward the business and, more precisely, toward the way it does business. That was what kept the customers coming back and if the new owner of the mark continues in the business the same way, it will enjoy the same increase in profits produced by the goodwill of the previous owner.

So the next time you do your banking at our fictionalized “Citicorp,” bank, don’t expect the candy on the counter or the free coffee or (for a few discerning banks), the teller asking if it would be okay for your dog to have a biscuit. There is a limit to goodwill, at least for banks.