Relief from Royalty vs MPEEM: Which Method to Use
RFR values IP using royalty savings. MPEEM isolates excess earnings from customer assets. When to use each method in PPA and intangible valuation.
Introduction
The Relief from Royalty (RFR) and Multi-Period Excess Earnings Method (MPEEM) are the two most frequently applied income-approach valuation methods in purchase price allocation. Both are endorsed by the AICPA Practice Aid on assets acquired in a business combination, and both produce fair value estimates under IFRS 3 and ASC 805. Yet they approach the valuation question from fundamentally different angles.
RFR asks: "What would the owner of this asset save by owning it rather than licensing it from a third party?" The method capitalises those hypothetical royalty savings into a present value. MPEEM asks: "After every other asset in the business has received its required return, what earnings are left that can be attributed to this specific intangible?" The method isolates residual cash flows and discounts them to present value.
Choosing between them is not arbitrary. The nature of the asset, the availability of market data, and the asset's role in the business all determine which method produces the most reliable and defensible fair value estimate.
How Relief from Royalty Works
The RFR method values an intangible asset by estimating the royalty payments the owner avoids by owning the asset outright rather than licensing it. The core steps are:
- Project revenue attributable to the asset over its remaining useful life
- Apply a royalty rate derived from comparable licensing transactions
- Deduct tax on the hypothetical royalty savings
- Apply a tax amortisation benefit (TAB) adjustment where applicable
- Discount the after-tax savings to present value using an appropriate discount rate
The method's elegance lies in its reliance on observable market data — specifically, royalty rates from licensing transactions between unrelated parties. When such data is available, RFR produces a market-corroborated fair value estimate that auditors and regulators find highly defensible.
Typical assets valued with RFR
| Asset Type | Royalty Rate Range | Data Availability |
|---|---|---|
| Trademarks and trade names | 1%–8% of revenue | Good — extensive licensing databases |
| Developed technology | 3%–10% of revenue | Good — technology licensing is common |
| Patents | 2%–15% of revenue | Moderate — varies by industry |
| Software | 5%–25% of revenue | Good — SaaS licensing is well-documented |
RFR is strongest when the asset being valued is the type of asset that is commonly licensed in the market. If you cannot find credible royalty rate benchmarks, the method's foundation weakens considerably.
How MPEEM Works
The Multi-Period Excess Earnings Method takes a different path. Rather than looking at what someone would pay to license the asset, it asks what earnings the asset generates after every other contributing asset has been compensated. The steps are:
- Project total cash flows of the business (or relevant business unit) over the forecast period
- Identify all contributory assets — tangible assets (property, equipment), working capital, workforce, other intangible assets
- Deduct a fair return on each contributory asset (the "contributory asset charges" or CACs)
- The residual — what remains after all CACs — is attributed to the primary intangible asset
- Discount the excess earnings to present value
MPEEM is conceptually straightforward but technically demanding. Every contributory asset must be valued and assigned a required rate of return. If the contributory asset charges are too high, the primary intangible will be understated; too low, and it will be overstated.
The AICPA Practice Aid recommends MPEEM for valuing the primary income-generating intangible asset in a business combination. Only one asset should be valued using MPEEM per reporting unit — using it for multiple assets creates circular dependencies.
Typical assets valued with MPEEM
| Asset Type | Why MPEEM Is Preferred |
|---|---|
| Customer relationships | Not typically licensed; primary revenue driver |
| Subscriber bases | Recurring revenue directly attributable to the relationship |
| Core deposits (banking) | Represent the primary earnings-generating intangible |
| Distribution networks | Revenue flows through the network; no licensing analogue |
Side-by-Side Comparison
Methodology comparison
| Criterion | RFR | MPEEM |
|---|---|---|
| Valuation basis | Hypothetical royalty savings | Residual earnings after contributory asset charges |
| Best suited for | IP with licensing analogues | Primary income-generating assets |
| Data requirements | Royalty rate benchmarks, revenue projections | Multi-period cash flows, contributory asset returns |
| Complexity | Moderate | High |
| Key risk | Royalty rate selection subjectivity | Contributory asset charge assumptions |
| Audit scrutiny focus | Royalty rate justification | CAC methodology and rates |
| Regulatory acceptance | Widely accepted for technology and brand | Preferred for customer relationships |
| Can value multiple assets? | Yes — each independently | No — only one primary asset per unit |
Data requirements in detail
RFR requires access to licensing databases such as RoyaltyStat, ktMINE, or internal comparable transactions. The quality of the valuation hinges directly on the relevance and comparability of the selected royalty rates.
MPEEM requires a comprehensive understanding of the entire asset base of the acquired business. Every contributory asset — from working capital to assembled workforce to existing technology — must be identified, valued, and assigned a return rate. This makes MPEEM inherently more complex but also more thorough in its treatment of the asset ecosystem.
Choose RFR When
- Asset has observable licensing comparables
- Brand or technology with clear royalty savings
- Licensing transactions exist in the industry
- You need a relatively straightforward income approach
- Multiple intangible assets need independent valuation
Choose MPEEM When
- Asset is the primary driver of business cash flows
- Customer relationships or similar non-licensable assets
- No reliable royalty rate benchmarks exist
- Asset generates identifiable excess earnings
- AICPA Practice Aid guidance applies
Practical Example: Acquiring a SaaS Business
Consider a private equity firm acquiring a B2B SaaS company for £50 million. The key intangible assets identified are:
- Developed technology (the software platform)
- Customer relationships (enterprise subscription base)
- Trade name (the brand)
The valuation team would typically use:
- RFR for the developed technology — SaaS licensing benchmarks are readily available, and the technology is the type of asset commonly licensed
- MPEEM for customer relationships — these are the primary income-generating asset, and customer relationships are not typically licensed
- RFR for the trade name — brand licensing benchmarks are well-established
In this scenario, RFR might value the technology at £12 million (using a 15% royalty rate) and the trade name at £3 million (using a 2% royalty rate). MPEEM might value the customer relationships at £18 million — the residual after contributory asset charges on the technology, trade name, workforce, and tangible assets. Together with goodwill, these allocate across the £50 million purchase price.
Common Pitfalls
RFR pitfalls
- Cherry-picking royalty rates that support a predetermined conclusion
- Using rates from non-comparable industries or transaction types
- Ignoring profit splits — the royalty rate should reflect an arm's-length split of economic returns
- Failing to adjust for differences in asset maturity, market position, or exclusivity
MPEEM pitfalls
- Omitting contributory assets — every asset that contributes to earnings must be identified
- Using inappropriate return rates on contributory assets (too high deflates the primary asset; too low inflates it)
- Applying MPEEM to multiple assets in the same reporting unit, creating circularity
- Ignoring the relationship between CACs and the discount rate — they should be internally consistent
Decision Framework
1. Identify the asset type
Is it commonly licensed (technology, brand, patents)? If yes, RFR is likely appropriate. Is it a customer relationship or primary income driver? MPEEM is likely the better choice.
2. Assess data availability
Are royalty rate benchmarks available from licensing databases? Can you build a defensible contributory asset charge model?
3. Consider regulatory expectations
Auditors expect MPEEM for customer relationships and RFR for technology. Deviating requires strong justification.
4. Cross-check the result
Where possible, use one method as a primary approach and the other as a reasonableness check. If both methods produce similar values, confidence is higher.
Conclusion
RFR and MPEEM are complementary rather than competing methods. In most purchase price allocations, both will be used — RFR for assets with licensing analogues and MPEEM for the primary income-generating intangible. The choice is driven by the nature of the asset, the availability of market data, and regulatory expectations.
For a deeper exploration of these and other valuation methods, see our Academy lesson on Valuation Methods: RFR, MPEEM, and With-and-Without, or explore the Accounting Standards lesson for the reporting framework context.
The Bottom Line
Use RFR when royalty benchmarks exist — it is straightforward, market-corroborated, and widely accepted. Use MPEEM when the asset is the primary income driver and licensing comparables are unavailable. In most PPAs, you will use both methods across different asset classes. The key is matching the method to the asset, not the other way around.
Related Glossary Terms
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