Royalty Rate Determination Process

Intellectual property (IP) licensing is big business. So big that it has become a $40 billion industry, according to IBISWorld. IP licensing affords IP owners a way of making revenue while maintaining rights to the IP. It allows them to offer their IP under negotiation to other businesses who want to use an invention that they didn’t create themselves. Therefore, in exchange for a fee, such as a royalty rate, the businesses can remain competitive.

However, determining royalty rates can be a challenging task. The following outlines the four-step process in determining royalty rates.

1. Identify key IP rights. IP valuation analysts determine the key rights that are subject to the royalty rate analysis. Therefore, the analysts seek to understand all fields of use, geographic restrictions, exclusivity restrictions, and others.

2. Identify value proposition of IP rights. The analysts determine the actual micro-economic value proposition associated with the rights afforded by the license grant. This entails quantifying the economic impacts of the IP rights.

3. Identify contributions of licensor and licensee. IP valuation analysts determine how each party contributes to the value of an IP. While the licensor naturally owns the IP rights, a licensee also brings value to the table through sales and distribution, manufacturing capability, and others. In order to apportion the contributions in an equitable manner, the analysts must identify what both parties bring to the transaction.

4. Apportion value based on licensor and licensee. The final, and easiest step, is to apportion the value. However, the analysts cannot perform this step without following the three previous steps. Without the other steps, the analysts would not have all of the details necessary to provide a reasonable royalty rate determination.

As shown, the royalty rate determination process takes four steps, but these steps require serious insight. At Pellegrino & Associates, we have years of experience determining royalty rates. Contact us today for more information!