Royalty rates in practice: applying relief-from-royalty

The relief-from-royalty method (RfR) is the most widely used way to value trade marks, brands and many technologies. Its logic is simple: an owner does not have to pay a royalty to use the asset, so the asset is worth the present value of the royalties it saves. The difficulty lies in the royalty rate. A rate that is weakly supported can move the value by more than any other input.

When the method fits

IVS 210 describes RfR as valuing an intangible asset by the hypothetical royalty payments saved by owning it rather than licensing it from a third party; conceptually it is a DCF applied to licensing income. EVS-IA 2026 adds that RfR should be used where market licensing evidence exists, or where a rational participant would license the asset rather than recreate or acquire it. It is typically suited to trade marks, software rights, copyrightable content and patented technology. It is a poor fit for assets that are rarely licensed, such as customer relationships.

Step by step (IVS 210, para 60.19)

1. Project the royalty base over the asset’s life, most often revenue, sometimes units or another metric.

2. Develop a royalty rate, from comparable arm’s-length licences, from a profit split, or both.

3. Apply the rate to the projections to estimate the royalties saved.

4. Deduct any costs a licensee would bear, depending on whether the benchmark royalty is gross or net of costs such as maintenance, marketing and advertising.

5. Apply tax where royalties would be deductible; for some intended uses, such as transfer pricing, tax effects are generally not considered.

6. Discount or capitalise the savings at a rate appropriate to the asset.

7. Where the intended use requires it, add the tax amortisation benefit (TAB).

Selecting the royalty rate

Market evidence: collect licences from databases, industry reports, public filings or competition decisions, then test comparability of the rights granted: scope, exclusivity, sub-licensing, field of use, territory and term. EVS-IA warns against headline rates that differ from effective paid rates because of thresholds, rebates or volume discounts, against benchmarks from very different legal environments, and against wide, heterogeneous ranges.

Positioning within the range: IVS 210 lists the factors that justify where the subject sits: the competitive environment, the importance of the asset to its owner, its life cycle and risk of obsolescence, and the profitability of the products that use it. A rate must make economic sense for the licensee: a manufacturer would not license a trade name at a rate that leaves it earning less on branded goods than on generic ones.

Profit split cross-check: compare the selected rate with the operating margin of the business that uses the asset. If a 5% royalty would absorb most of a 6% EBIT margin, the rate is almost certainly too high.

Matching the rate to the royalty base

EVS-IA requires the royalty base to reflect how the asset is actually monetised. Revenue suits assets that drive demand or pricing, such as brands and consumer-facing software. Unit bases suit patented components or active ingredients. Profit-based bases are appropriate only where market evidence supports profit sharing. A rate taken from revenue-based licences cannot be applied to a profit base without adjustment.

A worked example

Illustrative only. A trade name supports revenue of 100 in year 1, growing 5% a year. The benchmark supports a royalty of 3% of revenue, net of maintenance costs borne by the licensor. Tax is 25%, the asset-specific discount rate is 13% with mid-year discounting, and long-term growth after year 5 is 2%.

Year 1: revenue 100.0, royalty 3.00, after tax 2.25, discount factor 0.941, present value 2.12.

Year 2: revenue 105.0, royalty 3.15, after tax 2.36, discount factor 0.832, present value 1.97.

Year 3: revenue 110.3, royalty 3.31, after tax 2.48, discount factor 0.737, present value 1.83.

Year 4: revenue 115.8, royalty 3.47, after tax 2.60, discount factor 0.652, present value 1.70.

Year 5: revenue 121.6, royalty 3.65, after tax 2.73, discount factor 0.577, present value 1.58.

The explicit period is worth 9.19. Terminal value at year 5 is 2.73 × 1.02 ÷ (13% − 2%) = 25.36, worth 14.63 today, so the value before TAB is 23.82. With 15-year straight-line tax amortisation at 25%, the TAB factor is 1.129, adding 3.08 for a value of about 26.9. Note that terminal value is over 60% of the total: test the long-term growth and the rate with care.

Checks reviewers will make

• Is the royalty rate supported by evidence, not by a rule of thumb?

• Are the rights in the benchmark licences comparable in scope, exclusivity and territory?

• Is the royalty consistent with the profitability of the business using the asset?

• Are gross and net royalties treated consistently with the costs deducted?

• Does the discount rate reconcile with WACC, the transaction IRR and the weighted average return on assets?

• Is TAB included only where the intended use and basis of value support it?

Sources: IVS 210 Intangible Assets, paras 60.18–60.21 and section 110 (IVS 2025); EVS-IA 2026, relief-from-royalty and market approach guidance. Educational summary only; always rely on the official texts.

Read our approaches & methods guide →