Royalties

Royalties are periodic payments made by a licensee to an intellectual property rights holder — patent, brand, software, know-how — in exchange for the right to exploit those assets commercially. They are typically expressed as a percentage of revenues generated under the licence. In intangible asset valuation, the market royalty rate is the central parameter of the relief-from-royalty method — established by reference to comparable licence transaction databases (RoyaltyRange, ktMINE). In international tax, intragroup royalties are subject to arm's length transfer pricing requirements.

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Example: a Swiss pharmaceutical company pays royalties of 5% on CHF 20.0 million of pharmaceutical revenue (CHF 1.0 million annually) to a group entity owning the relevant patent. In the post-acquisition PPA, the patent value is calculated by the relief-from-royalty method: CHF 1.0 million × (1 - 14% tax) / 12% discount rate × duration factor = CHF 6.0 million — recognised as a separately identified intangible asset in the IFRS accounts.

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Hectelion analyses royalty rates and values royalty-generating intangibles for PPA, intellectual property transactions and transfer pricing documentation.

Observed royalty rates also serve as a valuation reference: see how to value a brand using royalty rates.