A recent study estimated that “two-thirds of the value of America’s large businesses can be traced to the intangible assets that embody ideas, especially the intellectual property (“IP”) of patents and trademarks.”1 While most business owners are probably already aware of this growing role of IP, finding the most effective way to manage that IP is still a significant challenge.
One potential strategy to effectively manage a company’s intellectual property involves using an intellectual property holding company (“IP Co.”). The IP Co. owns the IP and licenses it back to its parent, or other related party, for a licensing fee.
However, determining the appropriate royalty rate that the IP Co. should charge is often a challenge. While there are many methods that can be used to determine the appropriate royalty rate, the most common method involves searching for license agreements between third parties for similar IP. For example, if Pepsico wanted to determine an appropriate royalty rate for its Pepsi™ trademark, ideally it would look to what a similar trademark, such as Coca-Cola™ was licensed for in the marketplace.
Unfortunately, finding comparable license agreements is not that easy. It is difficult to find reliable sources of information on license agreements, and, even if that information can be found, finding license agreements that are truly “comparable” can be challenging. For example, the following is a non exhaustive list of criteria to consider in determining comparability:
- Similar IP (e.g., compare a patent to a patent, a trade secret to a trade secret, a trademark to a trademark);
- Similar industries (e.g., clothing retailer to clothing retailer);
- Similar profit potential;
- Similar terms (e.g., exclusive vs. non exclusive);
- Recent transactions (i.e., transactions that are not outdated).
Schneider Downs has significant experience in determining royalty rates for its clients and understands the key factors to consider in these analyses. Additionally, Schneider Downs has access to proprietary databases and other data sources that provide details on licenses of different types of intellectual property across various industries.
If you need assistance determining appropriate royalty rates for your IP, please contact Steve Thimons.
1Shapiro, Robert J. and Nam D. Pham, “Economic Effects of Intellectual Property-Intensive Manufacturing in the United States,” July 2007.
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