What royalty rate is used to value IP for lending?
Short Answer
There is no single fixed rate. Valuers derive it from comparable market licences for similar IP, and for lending they deliberately use a low-end, conservative rate to avoid overstating collateral value.
Full Explanation
No universal royalty rate exists. The Relief-from-Royalty method values an intangible by estimating the royalty a business would otherwise have to pay to licence the asset if it did not own it, then discounting those hypothetical savings to present value. The rate itself is derived from evidence: comparable licensing transactions for similar technology, brands or rights in the same sector, adjusted for the specific asset's strength, market position and remaining life. A strong, registered patent central to a product line commands a higher benchmark than a peripheral, unregistered right, so the appropriate rate is always asset-specific and evidence-led. For lending, the choice of rate is deliberately cautious. RICS Red Book guidance (VPGA 6, and its appendix on valuations supporting IP debt financing) directs valuers to adopt conservative inputs when the purpose is collateral rather than a going-concern transaction. In practice that means selecting from the low end of the comparable royalty range rather than the midpoint or top, pairing it with a risk-premium discount rate, preferring a finite economic life over a perpetuity, and treating terminal value cautiously or omitting it. The report should present a value range and sensitivity analysis rather than let a single 'most likely' figure obscure the downside a lender cares about most. This conservatism flows directly into how much you can borrow. The royalty rate feeds the income-approach value, which is then assessed on an orderly-liquidation premise and filtered through the lender's tests of separability, saleability and legal strength before an advance rate and loan-to-value are set. Where the IP generates actual licensing income, that attributable royalty stream is the preferred collateral for lenders, because the loan can be serviced from the very revenue the IP underpins, which is why royalty-bearing IP tends to attract more favourable terms than IP with no cash flow attached. When commissioning a valuation for borrowing, ask your valuer which comparable transactions informed the royalty rate, where in the range the selected rate sits and why, and how sensitive the value is to that assumption. A rate supported by genuine comparables and presented conservatively will survive a lender's credit review far better than an aggressive figure, and it gives you a realistic basis for planning how much to borrow.
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