How do you value a brand using the Relief from Royalty method?

Full Explanation

The Relief from Royalty (RFR) method is the most commonly used approach for brand valuation in purchase price allocations. The process involves five key steps. Step 1: Project brand-related revenue over the brand's useful life. This may be total company revenue if the brand is the primary commercial identity, or a subset if the company operates multiple brands. Step 2: Select a royalty rate by analysing comparable brand licence agreements in the same or adjacent industries. Common ranges: luxury goods 8-15%, consumer packaged goods 3-8%, technology 2-5%, B2B services 1-3%. Step 3: Calculate annual royalty savings by multiplying projected revenue by the royalty rate. Step 4: Apply the marginal tax rate to the royalty savings (since royalty payments would be tax-deductible, the savings are taxable). Step 5: Discount the after-tax royalty savings to present value using a brand-appropriate discount rate (typically at or near WACC for established brands). Optionally, apply the Tax Amortisation Benefit if the brand is tax-deductible in the relevant jurisdiction. Key sensitivities are the royalty rate selection and revenue growth assumptions — small changes in either can materially affect the result. Best practice is to cross-reference multiple comparable licence databases and present a range of values.

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