Intellectual property is an umbrella term for a set of intangible assets or assets that are not physical in nature. Startups can posses multiple kinds of IP - goodwill, patent and various technology. But how do you assess their value?
In this new article in The Startup Club Valuation Series, we give an overview of a valuation method for intellectual property (IP): the Relief from Royalty Method.
IP is an intangible asset. The value of IP typically comes into play when IP rights are infringed or when selling an asset or the entire business. The following are the key attributes for RFR (Relief from Royalty Method) to value the relevant IP Asset.
1. The RFR method is a variation of a DCF analysis that assumes that an IA is valuable because the asset owner avoids the cost of licensing the asset.
2. An estimate is made as to the appropriate royalty income that would be negotiated in an arms-length transaction if the subject IA were licensed from an independent third party.
3. The royalty savings are then calculated by multiplying a royalty rate, expressed as a % of revenues, times a determined royalty base (i.e. the applicable level of future revenue or net income).
4. The forecast period is determined based on the underlying asset's remaining useful economic and/or legal life. In the case of a patent or a technology, the period is finite.
5. The forecasted earnings are discounted to PV based on the risk characteristics of the given IA, taking into account the blend of assets in the company and its discount rate.
This combines to market & income method, giving a fuller picture on the company valuation.
By Dulal Das
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