How do you select comparable royalty rates for the Relief from Royalty method?

Full Explanation

Royalty rate selection is the most critical input in the Relief from Royalty method and must be supported by empirical market evidence. The process involves several steps. First, identify the relevant databases: RoyaltyStat, ktMINE, Markables, and Bloomberg are the most commonly used sources, containing thousands of arm's-length licensing agreements. Second, define search parameters: filter by industry (SIC/NAICS codes), asset type (brand, technology, trademark), geography, and transaction recency (prefer rates from the last 5-10 years). Third, select comparable agreements: review each potential comparable for relevance, considering the scope of the licence (exclusive vs non-exclusive), the responsibilities of each party (who bears development costs, marketing costs), and the profit margin of the licensee. Fourth, adjust for differences: if the subject asset is a market-leading brand and the comparable involves a secondary brand, an upward adjustment may be warranted. Consider exclusivity premiums (exclusive licences command higher rates), territorial scope, and the stage of the asset's lifecycle. Fifth, determine the appropriate point in the range: use the interquartile range of filtered rates and select a point estimate based on the subject asset's relative strength. Ranges quoted for royalty rates by asset type include technology (3-8%), brands/trademarks (1-5%), software (10-25%), and pharmaceutical compounds (3-8% for established drugs, 15-25% for novel compounds), but these are illustrative ranges only, not benchmarks: the actual rate depends on the comparable licence evidence for the asset. The selected rate must be documented with the full search methodology, list of comparables considered and rejected, and the basis for the final rate selection.

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