Understanding the Relief from Royalty Method for Valuing Intellectual Property and Intangible Assets

Introduction

In today’s economy, intangible assets like trademarks, patents, proprietary software, and customer relationships often represent the most valuable components of a business. Yet, valuing these assets accurately is a complex task—especially when the stakes involve tax compliance, litigation, or strategic transactions.

One of the most widely accepted and practical approaches is the Relief from Royalty Method. This technique estimates the value of owning an intangible asset by calculating the hypothetical royalty payments a business avoids by not licensing it from a third party.

What Is the Relief from Royalty Method?

The Relief from Royalty Method is a hybrid of the income and market approaches to valuation. It assumes that if a company did not own a particular intangible asset, it would need to license it—incurring royalty payments over time. By owning the asset, the company is “relieved” from paying those royalties, and the present value of those avoided payments represents the asset’s value.

This method is especially useful for assets that:

• Could be licensed in the open market

• Generate identifiable revenue streams

• Have a defined or estimable useful life

Step-by-Step Breakdown of the Valuation Process

1. Identify Comparable Royalty Rates
   The first step is to determine a market-based royalty rate. This involves analyzing licensing agreements, industry databases, and public filings to find comparable rates for similar assets. For example, trademarks in the consumer goods sector may command royalty rates between 1% and 5%, while software licenses may range from 5% to 15%.

2. Forecast Revenue Attributable to the Asset
   Next, we project the future revenue that can be directly linked to the asset. For a trademark, this might be product sales under a branded name. For software, it could be subscription or licensing revenue. The forecast should be realistic, defensible, and aligned with historical performance and market trends.

3. Apply the Royalty Rate
   Multiply the projected revenue by the selected royalty rate to calculate the annual “relief” amount. This represents the hypothetical royalty payment the company avoids each year by owning the asset.

4. Adjust for Taxes
   Royalty payments are typically tax-deductible. Therefore, the relief amount must be adjusted to reflect the after-tax savings. This ensures the valuation reflects the true economic benefit to the business.

5. Discount to Present Value
   Future royalty savings are discounted to present value using an appropriate discount rate—often the company’s weighted average cost of capital (WACC). This step accounts for the time value of money and risk associated with the asset.

6. Calculate Terminal Value (if applicable)
   For assets with indefinite lives, such as trademarks, a terminal value may be added to capture long-term benefits beyond the forecast period. This is especially relevant when the asset is expected to generate revenue indefinitely.

When Is the Relief from Royalty Method Most Appropriate?

This method is particularly effective when:

• The asset is commonly licensed in the market

• Reliable market data exists for royalty rates

• The asset supports identifiable and measurable revenue streams

• The valuation is needed for tax, legal, or strategic purposes

It is commonly used in:

• M&A transactions to allocate purchase price

• Tax planning and transfer pricing documentation

• Litigation involving IP infringement or damages

• Financial reporting under IFRS or GAAP

• Strategic decision-making for licensing or divestment

Applications by Asset Type

• Trademarks: Ideal for this method due to their brand equity and indefinite useful life. Royalty rates are often available from industry benchmarks.

• Patents: Suitable for product-based patents with defined legal lives and predictable revenue streams.

• Software & Databases: Effective for subscription-based platforms or licensed enterprise tools.

• Customer Relationships: Can be valued using proxies such as CRM licensing models or acquisition cost equivalents.

Advantages of the Relief from Royalty Method

• Market-aligned: Uses real-world licensing data to ground the valuation.

• Audit-friendly: Accepted by tax authorities and financial regulators.

• Defensible: Provides a clear rationale for the asset’s value.

• Flexible: Can be applied across industries and asset types.

• Transparent: Easy to explain to stakeholders, auditors, and courts.

Limitations to Consider

• Data dependency: Requires reliable market data for royalty rates.

• Revenue attribution: Can be subjective, especially for multi-use assets.

• Licensing assumption: Assumes the asset could be licensed, which may not always be realistic.

• Tax treatment: Varies by jurisdiction and must be carefully modeled.

Final Thoughts

The Relief from Royalty Method is a powerful tool for valuing intangible assets—but only when applied with precision, context, and commercial understanding. At Mountain Peak Advisory, we combine technical rigour with strategic acumen to help business owners unlock the full value of their intellectual property.

Need expert valuation advice? Contact us today for a confidential discussion.