Relief from royalty
Valuation & CompsValuing an intangible as the stream of royalties the business would have had to pay had it licensed the asset from somebody else.
Also written: relief from royalty method, royalty relief
The logic is that owning a brand or a technology saves you from renting it. Estimate the royalty a third party would charge for the right to use it, apply that rate to the revenue the asset supports, tax the result, and discount it over the asset's life. The present value is what the asset is worth.
It is the standard method for brands, trade names and developed technology, because licensing markets exist for those things and give some evidence of a rate. Customer relationships are usually valued a different way, by multi period excess earnings, which projects the cash flows attributable to the customers who already exist, applies an attrition rate as they churn away and charges a return for the other assets used to serve them.
The weakness is concentrated in one input. The royalty rate is almost the entire answer, and comparable licence agreements are thin, unevenly disclosed and negotiated in circumstances you cannot see. A range of one to three percent of revenue is not precision, it is a threefold difference in value.
It matters commercially because the output drives years of reported earnings through the amortisation charge and, in an asset deal, drives a real tax deduction. That is why the allocation is done by valuation specialists and audited, rather than being agreed between the deal team and the seller.
Worked example
A brand supports 500 of annual revenue and comparable licences suggest a royalty of 2%, so 10 a year before tax and 7.5 after tax at a 25% rate.
Discounted over ten years at 10%, that stream is worth roughly 46, and that is the figure recognised for the brand at completion.
Move the royalty rate to 3% and the same brand is worth roughly 69. Nothing about the business changed, only an assumption drawn from a thin set of comparable licences.