Last week I published Part 1 of this Founder’s Guide which was an overview article on how to use a strong intellectual property portfolio to strengthen your negotiating position with would-be acquirers to maximize your value and take at closing.
As I explained in Part 1, valuations of startups are typically based on a combination of the company’s EBITDA and a multiplier. The negotiation of the multiplier is often where business owners make or lose millions, or, in the case of those majestic unicorns, billions of dollars. Given there are market conditions and business aspects that influence the multiplier, but the ability to negotiate an above-market multiplier or being forced to take a below-market multiplier is generally a function of (1) buyer or investor comfort with the cleanliness of the deal, (2) whether there are off-balance-sheet value enhancers, like good will, and (3) an overall lack of risk being assumed.
In this article I’m going to dial in a little more on how to maximize your company’s value and your take as a founder by using a strong and defensible trademark for your business branding. In the M&A deals I have worked on, I’ve noticed that the valuation of the target company that will continue to operate under its own brand is usually significantly higher than for the company that is being acquired for its assets alone and not its brand. An important aspect of branding is choosing a brand that can be backed by a strong, defensible trademark. You may be wondering, what goes into a strong, defensible trademark. Keep reading and I’ll tell you.
Step 1: Choose a “Fanciful or Artful” Brand for a Strong Trademark
The strength of a trademark depends on how the name relates to the goods and services being provided. Trademark law has identified the following categories of trademark strength from strong to weak:
- Fanciful or Artful (Strongest)
- Suggestive (Strong)
- Descriptive (Weak)
- Generic (Weakest)
Fanciful and Artful. Fanciful isn’t usually a goal in business, but in branding and trademarks it is. A fanciful or artful mark is one where the mark has nothing to do with the goods or services being sold. Like using the word “Orange” for your content marketing company. Or, from a real example, using the name “Domo” for a business intelligence company.
Suggestive. Suggestive in this sense isn’t referring to “suggestive” music or television content like my grandmother was concerned about me consuming as a young man. In trademark law, a suggestive mark is one that suggests a characteristic of the goods and services being sold. For example, Little Caesar’s Pizza’s mark “Hot and Ready” is a suggestive mark of the characteristics of the pizza they sell.
Descriptive. Descriptive marks are similar to suggestive marks but are even more literal in their describing the good or service being sold. Selling hot sauce under the mark “Spicy” would be a descriptive mark.
Generic. Generic marks are those that literally identify the goods and services being sold. For example, the mark “Car” for the sale of cars would be a generic mark. Generic marks often are refused registration.
Take Home. The take home here is to brand your business using a “fanciful or artful” mark, something that is catchy and unrelated to the goods and services that your business sells.
Step 2: Determine if There is a Likelihood of Confusion with Another Mark
Now that you have a fanciful and artful brand, the next thing that you need to do to have a strong, defensible mark, is to determine whether your mark is going to encounter a likelihood of confusion with another trademark. Under trademark law, two different businesses may have identical or similar marks so long as they don’t sell the same goods and services. So the overlap that you are looking for is two fold: (1) whether the marks are the same or similar; and (2) if the names are the same or similar, do the companies sell similar goods or services.
Trademark Search. So to accomplish the first task, you need to search whether there are other companies out there with a similar name or mark. The way this is done is by searching the following databases:
- TESS Database on the United States Patent and Trademark Office website (USPTO). (This is where you can both identify if there are similar marks and determine if there is an overlap in the goods and services sold under the two marks).
- Online google and search engine search for prior use.
- State Trademark registries usually on the State’s Secretary of State website.
- Business name databases and registries usually on the State’s Secretary of State website.
This can be a complicated and long search process. One tool that is available is to have LegalZoom conduct this search for you. This is usually a cost effective way to complete this search, especially if you attorney is doing it for you. I still would suggest you have an attorney review that report and register the trademark.
Similarity of Marks. In conducting this search, the spelling of the brands or names is not the only factor that is important. The following are the important factors to consider whether the name/brand is the same or similar:
- Spelling of Marks
- Sound of Marks
- Appearance of Marks
- Meaning of Marks
- Commercial Impression Given by Marks
Sound of Marks. Spelling of marks is self explanatory so I’ll move onto the next. If two marks sound the same, then there could be a likelihood of confusion. For example, if I want to register LWYR but there is already a Lawyer mark, I will likely run into issues for the marks sounding the same if there is an overlap in goods and services of the two marks.
Appearance of Marks. This issue usually rears its ugly head when logos are being trademarked and the two logos are not identical but resemble each other. An example of this, is a logo that resembles the superman logo with a different letter or different style, but appears similar.
Meaning of Marks. Two marks will be considered the same or similar if the two marks used are not the same word but have the same meaning. This usually comes up when a word in another language is used. For example, “Wolf Chicken” would be considered similar to “Lobo Chicken” because Lobo means wolf in Spanish.
Commercial Impression. The USPTO may consider two marks that give the same commercial impression to a consumer to be confusingly similar. For example, “Wild Boy Boxers” may be considered confusingly similar to “Crazy Man Boxers.”Take Home. These are nuanced issues and in reviewing and working through these issues is where attorney’s fees are worth their while.
Step 3: Register and Enforce Your Mark
The final step is to register your mark with the USPTO, brand away, and enforce your mark by stopping imitators from using similar marks that will dilute the strength of the mark and brand.
Registration. Register your mark with the USPTO. The following are numerous advantages to registering your mark:
- Legal presumption that your business owns the mark and exclusive rights to it. (This will save you a ton of money if you have to file suit to enforce your mark).
- Public notice of your trademark and brand.
- The ability to record with U.S. Customs & Border Protection to prevent importation of infringing foreign goods.
- Your ability to use the official trademark symbol on your marketing and advertising materials.
- Ability to bring lawsuit in federal court.
- Ability to use U.S. registration as basis for foreign registration. (As you expand internationally, this will save you a lot of money as well).
Enforce Your Mark. The final step to maintaining a strong, defensible mark is to enforce your mark when imitators emerge. Part of keeping your mark strong and defensible is preserving your mark undiluted by other people using the mark in an unauthorized manner. The more that the mark holder permits the unauthorized use of the mark, the more difficult legally it is to enforce the mark and stop other people from using the mark. For that reason it is best practice to have an employee regularly search online for the unauthorized use of the mark, and, if any such use is found, to quickly send cease and desist letters to those parties using the mark.
Conclusion. Creating a brand worth buying requires that you have a strong, defensible trademark behind that brand. The stronger the mark and the brand, the higher the value and larger the multiplier you are going to be able to negotiate with a potential buyer. When there is value in the name and good will of the business and not just in the assets themselves, the more you are going to get paid.