How to Choose Between RFR and MPEEM for Your Valuation

The Method Selection Problem

Every purchase price allocation begins with a deceptively simple question: which valuation method should we apply to each identified intangible asset? The answer matters enormously. Selecting the wrong method does not just produce a different number — it can produce a fundamentally flawed valuation that fails audit scrutiny and misrepresents the economics of the acquisition.

The two most frequently applied methods for intangible asset valuation under IFRS 3 and ASC 805 are the Relief from Royalty (RFR) method and the Multi-Period Excess Earnings Method (MPEEM). Both are income-based approaches, but they model value creation through entirely different lenses. Understanding when each method is appropriate — and when it is not — separates competent valuations from defensible ones.

70%+ of PPA intangible values use RFR or MPEEM

2 dominant income-based valuation methods

5-15% typical valuation variance between methods

★ Key Takeaway

The choice between RFR and MPEEM is not arbitrary. Each method has specific conditions under which it produces the most reliable fair value estimate. Applying the wrong method to a given asset class is the single most common source of valuation challenge in purchase price allocations.

How RFR Works

The Relief from Royalty method values an intangible asset by estimating what the owner would have to pay in royalty fees if they did not own the asset and had to license it from a third party. The "relief" from paying that royalty represents the economic benefit of ownership.

RFR Calculation Steps

Project the revenue attributable to the asset

Forecast the revenue stream that depends on or benefits from the intangible asset over its remaining useful life.

Select an appropriate royalty rate

Identify a market-derived royalty rate from comparable licensing transactions for similar assets in similar industries.

Calculate the hypothetical royalty savings

Multiply projected revenue by the royalty rate for each period to determine the pre-tax royalty savings.

Apply tax and discount the cash flows

Deduct tax on the royalty savings and discount the after-tax cash flows to present value using an appropriate discount rate.

The elegance of RFR lies in its simplicity. It requires relatively few assumptions beyond the royalty rate and revenue forecast, making it transparent and auditable. However, the method's validity depends entirely on the availability of credible comparable royalty rates — and for many intangible asset types, such data simply does not exist.

How MPEEM Works

The Multi-Period Excess Earnings Method takes a fundamentally different approach. Rather than modelling a hypothetical licensing arrangement, MPEEM isolates the earnings attributable to a specific intangible asset by deducting the economic returns required by all other assets that contribute to those earnings.

These deductions — known as contributory asset charges — represent the fair return that tangible assets, workforce, and other intangible assets would require if they were rented or leased. What remains after all contributory charges are deducted is the "excess" earnings attributable to the primary intangible asset being valued.

ℹ Note

MPEEM is sometimes called the "residual method" because it values an asset as the residual earnings after all other contributing assets have been compensated. This is conceptually sound but makes the result sensitive to errors in any of the contributory asset charge calculations.

MPEEM Calculation Steps

Step	Action	Key Input
1	Forecast total earnings	Revenue, costs, margins
2	Identify all contributory assets	Working capital, fixed assets, workforce, other intangibles
3	Calculate contributory asset charges	Fair return on each asset's value
4	Deduct charges from total earnings	Isolate excess earnings
5	Apply tax effect	Tax-adjust the excess earnings
6	Discount to present value	Use asset-specific discount rate

The Decision Framework

The choice between RFR and MPEEM should be driven by the characteristics of the asset being valued, the availability of market data, and the asset's relationship to the overall business earnings.

When to Use RFR

RFR is the preferred method when three conditions are met:

The asset is commonly licensed in the market. Trade names, technology patents, and certain software assets have established licensing markets with observable royalty rates.
The asset contributes to revenue but is not the primary earnings driver. RFR works best for assets that enhance revenue rather than being the sole source of it.
Comparable royalty data is available. Databases such as RoyaltyStat, ktMINE, and the Royalty Range provide transaction data that supports rate selection.

When to Use MPEEM

MPEEM is the preferred method when:

The asset is the primary driver of business earnings. Customer relationships and certain proprietary technologies often qualify because they are the central asset around which the business generates profit.
No reliable licensing market exists. Many intangible assets — customer contracts, assembled workforce knowledge, proprietary processes — are rarely if ever licensed to third parties.
The asset's value derives from its interaction with other business assets. MPEEM explicitly accounts for these interactions through contributory asset charges.

Decision Matrix

Factor	Favours RFR	Favours MPEEM
Licensing market exists	Yes	No
Asset is commonly licensed	Yes	No
Asset is the primary earnings driver	No	Yes
Revenue attribution is straightforward	Yes	Complex
Contributory assets are well-defined	Not required	Required
Comparable royalty data available	Yes	Not required
Asset interacts with other assets to generate value	Simple interaction	Complex interaction

⚠ Warning

Never apply MPEEM to more than one intangible asset within the same valuation. Since MPEEM attributes residual earnings to a single asset after deducting returns on all others, applying it to two assets simultaneously would double-count earnings. If you need to value multiple intangible assets, use MPEEM for the primary asset and RFR or the cost approach for the others.

Common Asset-Method Pairings

Experience across hundreds of purchase price allocations reveals consistent patterns in how assets and methods are paired:

Intangible Asset	Typical Primary Method	Typical Secondary Method
Trade names and trademarks	RFR	Income approach
Technology and patents	RFR	MPEEM (if primary asset)
Customer relationships	MPEEM	Income approach
Customer contracts and backlog	MPEEM or income approach	—
Non-compete agreements	With-and-Without	—
Assembled workforce	Cost approach	—
In-process R&D	MPEEM or income approach	Cost approach
Favourable contracts	Income approach	—

These pairings are conventions, not rules. The valuer must exercise professional judgement in every case, considering the specific facts and circumstances of the acquisition.

Practical Considerations

Data Requirements

RFR typically requires less data than MPEEM. Beyond the standard revenue forecast, RFR needs only a defensible royalty rate and the asset's useful life. MPEEM requires a complete picture of all contributory assets, their fair values, and their required returns — which often means valuing several assets before you can value the primary one.

Auditability

Both methods are well-established and accepted by auditors under IFRS and US GAAP. However, RFR valuations are generally easier to audit because the key assumptions (royalty rate, revenue, discount rate) are fewer and more directly observable. MPEEM valuations involve more assumptions and more opportunities for error, making the documentation burden heavier.

Sensitivity

MPEEM valuations are inherently more sensitive to assumption changes because errors compound. An overestimate in one contributory asset charge flows directly into an underestimate of the primary asset value. RFR valuations are most sensitive to the royalty rate selection — a 1% change in royalty rate can produce a 15-25% change in asset value, depending on the revenue base.

The Bottom Line

Choose RFR when comparable licensing data exists and the asset is not the primary earnings driver. Choose MPEEM when the asset is the central earnings engine and no licensing market exists. When in doubt, consider whether a credible royalty rate can be identified — if it can, RFR is usually the more transparent and defensible approach.

Cross-Checking Your Result

Regardless of which method you select, always cross-check the result against the total purchase price and the WARA reconciliation. The sum of all identified intangible asset values, tangible assets, and goodwill must reconcile to the total consideration paid. If one method produces a value that makes this reconciliation implausible, revisit the assumptions before switching methods.

The Opagio Calculator supports both RFR and MPEEM calculations and can model the impact of different method selections on the overall PPA outcome. For a deeper treatment of each method with worked examples, see the Valuation Methods programme in the Opagio Academy.

Tony Hillier is an Advisor at Opagio with 30 years of experience in structured finance, M&A advisory, and asset valuation. He has led purchase price allocations across technology, financial services, and managed services sectors. Meet the team.

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Tony Hillier — Chairman, Co-Founder

MA, Balliol College, University of Oxford | Harvard Business School MBA with Distinction

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