Royalty rate research now requires examination of the full text of comparable license agreements

In the wake of the Uniloc decision that threw out the “25% Rule,” valuators turn to searching for comparable data in sea of licenses. To be sure, as pointed out by Steve Economou of Parente Beard, writing in January’s Business Valuation Update, strict third-party review of valuation reports points out the challenges of using comparable royalty rate data, many of which are eased by careful examination of the full text of relevant IP license agreements.

1. Data points are typically wide ranging (e.g., 1% to 9%): there are oft times reasons for the disparity, explainable upon review of the full text of the license agreements;
2. Underlying terms of any single royalty agreement may negate its comparability: valuators should examine the full text of agreements used in royalty research to find like terms and circumstances;
3. Data are from extended periods of time;
4. Data are from large and small companies;
5. Assessing the quality of a technology from a licensing agreement is difficult;
6. Evaluating underlying economics and motivations in each transaction is difficult; and
7. Many agreements are between related parties: again, a review of the full-text of the license agreements can reveal related parties or lead to further related research.