What is the royalty rate and how do you benchmark them?

Full Explanation

Royalty rates vary dramatically by asset type and industry. Brand licences (Nike, Disney): 5-8% of revenue. Software licences: 2-5% depending on features. Patents: 2-5% for product patents, 1-3% for manufacturing patents. Trademarks: 2-4%. The rate reflects the value of the asset: premium brands command higher rates because licensees expect significant revenue uplift. Benchmarking sources: 1) Royalty Stat (subscription database with 20,000+ licence agreements), 2) industry reports (often published by association), 3) court cases (if litigation set royalty rates), 4) private licensing data (if you can access it). For startups, estimating royalty rates requires research: identify publicly disclosed licences in your category, adjust for company size/geography/quality differences, and select a defensible midpoint. For example, if SaaS customer relationship management tools licence their software at 3-4% of customer ACV, and your customer is similar, 3.5% is reasonable. The Relief from Royalty method then calculates: annual revenue × 3.5% × tax factor × (1 / discount rate) to estimate present value. Small changes in royalty rate have large impacts on valuation: shifting from 3% to 4% increases valuation by 33%.

Related Questions