The Relief From Royalty Method a particularly common method, whereby the value of an intangible asset is determined with reference to the value of the hypothetical royalty payments that would be saved by owning the subject asset instead of licensing the subject asset.
The Relief From Royalty Method is widely used and has often been accepted by courts and regulatory bodies.
How is the Relief From Royalty Method Applied?
The main steps in applying the Relief From Royalty Method are:
- Develop projections associated with the income stream generated by the subject intangible asset over the life of that asset. In doing so, the most common metric projected is revenue, as most royalties are paid as a percentage of revenue;
- Develop a royalty rate for the subject intangible asset. Two methods can be used to derive a hypothetical royalty rate. The first is based on market royalty rates for comparable or similar transactions. A prerequisite for this method is the existence of comparable intangible assets that are licensed at arm’s length on a regular basis. The second method is based on a split of profits that would hypothetically be paid in an arm’s length transaction by a willing licensee to a willing licensor for the rights to use the subject intangible asset;
- Apply the selected royalty rate to the projections to calculate the royalty payments avoided by owning the intangible asset;
- Estimate any additional expenses for which a licensee of the subject asset would be responsible, and;
- Determine the appropriate discount rate for the subject intangible asset and calculate the present value or capitalise the savings associated with ownership of the intangible asset.
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Groves & Partners are expert business transaction advisors and valuers, with significant experience in valuing intangible assets including through application of the Relief From Royalty Method.