The ‘Royalty Relief’ (also known as Relief from Royalty) method is based on the notion that a brand holding company owns the brand and licenses it to an operating company. The notional price paid by the operating company to the brand company is expressed as a royalty rate. The Net Present Value (NPV) of all forecast royalties represents the value of the brand to the business.
The attraction of this method is that it is based on commercial practice in the real world. It involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting estimated future, post-tax royalties, to arrive at an NPV.
The ‘Royalty Relief’ method is used for 2 reasons:
- It is favored by tax authorities and the courts because it calculates brand values by reference to documented, third-party transactions
- It can be done based on publicly available financial information.
Steps in the Royalty Relief brand valuation process:
- Obtain brand-specific financial and revenue data,
- Model the market to identify market demand and the position of individual brands in the context of market competitors,
- Establish the notional royalty rate for each brand,
- Calculate the notional future royalty income stream for each brand,
- Calculate discount rate specific to each brand, taking account of its size, international presence, reputation, and Brand Rating,
- Discount future royalty stream to a net present value (NPV), which represent the fair value of the tradename/brand.
Tradename – Relief from Royalty – Calculation example
WARA = Weighted Average Return on Assets