Royalty benchmarking reports

The most appropriate methodology for determining a reasonable royalty rate is that which leaves the least number of questions unanswered. Unfortunately, databases such as give insufficient information about the licensee to pass a thorough inquiry wholly intact. For example:

  • What is the profit before interest and tax (PBIT) of the licensee and the division in which the intellectual property (IP) is used?
  • Does the IP result in the licensee adding a premium to the price of goods manufactured using the IP?
  • What other IP does the licensee own and use?
  • What other royalties are payable by the licensee?
  • What is the net tangible asset value of the licensee?
  • What were the relative bargaining strengths of the parties?
  • Was alternative IP available to the licensee, and at what cost?
  • To what degree is the IP a driver of sales/profits of the licensee?
  • Does the IP represent a relatively strong arsenal of assets?
  • Does IP grant the user protection from competition?
  • Is the IP valid and enforceable?

Accordingly, despite the OECD and IRS’ apparent support of this methodology, benchmarking reports are seldom an appropriate method for determining a reasonable royalty. In my opinion, benchmarking reports should always be used in conjunction with a determination of royalty rates using first principles. Put another way: they should be used in support of a royalty rate and not as its foundation stone.

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