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Royalty Rates For IP

Written by Rehana Ali on 15 January 2013

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How much are you likely to pay for using someone elses IP?

There are no set charges for the use of particular types of IP. An IP rights holder will negotiate a price with a business wishing to use their rights. The UK Intellectual Property has issued guidance on this matter as summarised below:

Royalty rates and the 25% Rule Of Thumb:

  • The royalty rate commonly agreed on the use of patents is between 25-33% on the anticipated gross profit (before tax) of the licensee on the sales of the products utilising the patent.
  • The likely rate for the use of a trade mark stands at between 10-15%.

In order to get a figure for gross profit it is common to take into account the costs of manufacturing i.e. purchasing of raw materials, utilities and labour, however the operating costs such as general overheads are commonly disregarded. (This is the situation even though the value of the Intellectual Property Right to the licensee is affected by its operating expenses.)

The more the licensee expends on marketing, sales and customer service/support, the less valuable the IP right to the licensee. A royalty rate that doesnt take this into account is impractical.

The majority of royalties are based on net sales and so the 25% rule is modified somewhat for net sales i.e. in sectors where profits are high, royalty rates are higher, in markets where profits are low, royalty rates are also low. Research has found that the average royalty rate based on net sales stands at around 5%, as this figure is an average and the underlining factors vary widely.

It is argued that all rules of thumb fail to take account of crucial factors such as circumstances of parties, risk involved and investment costs. IP specialists are of the view that any rule of thumb should serve only as a starting point and should not be given preference over an in depth analysis of IP valuation (considering individual circumstances) with application of crucial commercial acumen.

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