When should you use RFR vs MPEEM for intangible asset valuation?

Full Explanation

The choice between Relief from Royalty and Multi-Period Excess Earnings Method depends on the nature of the intangible asset and the availability of market data. RFR values an asset by estimating the royalty payment the owner avoids by owning it outright. It is best suited for assets with observable licensing markets — brands, trademarks, patented technology, and software — where comparable royalty rates exist. The method projects revenue attributable to the asset, applies a market royalty rate, and discounts the after-tax royalty savings. MPEEM values an asset by isolating its excess earnings contribution after deducting returns on all other contributory assets. It is best suited for customer relationships, subscriber bases, and long-term contracts where the asset generates a measurable earnings stream but lacks a licensing market. In many PPAs, both methods are used: RFR for the brand and technology, MPEEM for customer relationships. The AICPA Practice Aid on intangible asset valuation recommends MPEEM as the primary method for the single most valuable intangible (typically customer relationships), while RFR works well for assets where royalty rate benchmarks are available. Using MPEEM for more than one asset creates methodological issues (double-counting of earnings), so it is typically applied to only one intangible per valuation. Understanding this distinction ensures the right method is matched to each asset class.

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