How to document the selection of a royalty rate when valuing intellectual property assets or rights

Under the Mandatory Performance Framework (MPF) for the Certified in Entity and Intangibles Valuation (CEIV) credential, valuation experts will be expected to have a certain amount of documentation in their work files. Regardless of whether you hold the CEIV credential or not, anyone doing fair value for financial reporting should comply with these new rules.

Practice aid

A good compliance tool is a work file checklist that reflects what the MPF requires. In past issues of Business Valuation Update (BVU), we presented checklists for a number of valuation areas. In this post, we give you a checklist for how to document the selection of a royalty rate when valuing intellectual property assets or rights such as trademarks, trade names, or patents. The MPF points out that the foundation of the relief from royalty method is that a buyer would be relieved from the need to pay a royalty for the right to use an intellectual property asset. “Therefore, market-based royalty rates appropriate for a specific intangible asset must be estimated,” the MPF says. “If market-based royalty rates are not available, simulated royalties or rules-of-thumb rates are often used.”

An important point the MPF stresses is that valuation professionals should understand the terms of observed royalty rates. These terms include upfront payments, graduated rates, or a percentage of revenue versus royalty per unit sold. It’s also important to understand whether a licensee or a licensor is responsible for any expenses.

This checklist is based on what is contained in the two MPF documents, which you can download from a special website set up for the CEIV credential.

View the PDF of the Work File Checklist >>

To see more work file checklists that go into specifics on the documentation requirement for other methods, inputs, and assets/liabilities, check out the Business Valuation Update monthly newsletter.