What is the royalty based method of intangible assets valuation?

What is the royalty based method of intangible assets valuation?
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What is the royalty based method of intangible assets valuation?

The relief from royalty (RFR) approach is based on the idea that the fair value of an intangible asset equals the present value of the cost savings realized by the owner of the asset that results from not having to pay royalties for the use of the intangible asset to another party.

Relief from royalty method under income approach on trade names, brands and technology assets.

There is various legislation governing IP rights available in Malaysia from the Patents Act, Industrial Design Act, Trade Mark Act & Copyright Act

In short, the RFR is based on the measurement of the license payments, from a market database, which has been saved as a consequence of having ownership of the assets.

Six steps on relief from royalty methods

Step 1: Set the preliminary

1.1 Purpose of valuation
1.2 Standard or basis of value (market vs investment vs liquidation value)
1.3 Premise of value

Step 2: Understand the subject intangible assets

Step 3: Estimate economic benefits (revenue projection)

Step 4: Estimate hypothetical royalty rate

4.1 25% on gross margin, profit margin, EBIT, OPM, EBITDA

The “25 percent rule” is a general rule of thumb that suggests, as a starting point in a negotiation, that a licensee would pay 25 percent of its expected profits as a royalty for products that incorporate the licensed intellectual property (IP)

4.2 Industry royalty rate: RoyaltySource

RoyaltySource has been tracking intellectual property news and licenses related to technology (patent, know-how, trade secret, and business method), software, trademark, trade name, brand or logo, copyright and right of publicity for 30 years..


4.3 Company disclosures: Audited financial statement, paid subscription (Bloomberg, S&P Capital IQ), Free (Yahoo Finance, Bursa, Malaysiastock.biz)

4.4 Transactional approach

Step 5: Estimate discount rate

5.1 Weighted average cost of capital (WACC)
5.2 Cost of equity = R (risk free) + beta {R(market)-R(risk free)}

Step 6 : Calculation (to be continued)

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