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Valuing Intellectual Property: Income/Relief-From-Royalty Approach

This is the last in the series on Valuing Intellectual Property. This post will cover the Income/Relief-From-Royalty Approach. Click on the following to read the first in the series: Valuing Intellectual Property. And, click on the following to read the other two Valuing Intellectual Property break-out posts on Cost Approach and Market Approach.

The income method to valuing intellectual property (IP) assets is based on the income-producing capability of the IP. It is determined by the anticipated income that can be derived over the life of the piece of a business that is tied to the subject IP assets.

Through this methodology, factors used to determine the value of IP assets over their lifetime include size and factors influencing the potential and future market factors, risk factors, competitive landscape, and customer attractiveness.

The relief-from-royalty method is considered to be a subset of the income method. Through this approach the value of the IP asset is equal to the value of the after-tax royalties that the owner is “relieved” from paying by virtue of owning the assets. A royalty rate is used to establish the potential cash flow that can be associated with the IP. The royalty rate is determined by what a licensee would be willing to pay for use of the IP and based on a percentage of revenues.

Oftentimes, the “25-percent rule” will be used in such a case, which assumes a royalty equal to 25% of the operating profits of the business for which the licensed IP is used. The income stream calculated using the royalty becomes representative of the economic benefit attributable to the IP. A capitalization of that income stream becomes an indication of value. However, this may only represent a fraction of the economic benefit attributable to the IP assets.

As we mentioned in the first post in this series, there is overlap among all the approaches used to value intellectual property, and an appraiser should look at all of these methodologies before determining the value of IP assets.

By: Present Value

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