When establishing the terms of an intellectual property (IP) licence it can be very difficult to establish the potential value of the royalty payments.

Many factors need to be considered. For example, the intellectual property owner may still be involved in terms of ongoing research or actual sales which may negate the need for payment. In this instance a royalty-free licence would come into play.

Generally speaking, an IP licence would be one or a combination of the following:

An up-front licence fee
Ongoing licence fees
Rolling royalties

A rolling royalty is usually a percentage fee based on the number of units sold. Establishing that percentage, however, can get complicated.

Using the cost approach would entail establishing and paying for the actual costs of the IP. This would include research and development costs, patenting costs, etc. While this may be a good jump off point, it doesn’t take into account the market value of the IP.

Comparing the product to others in an active market will give a good indication of its current and potential value, but poses another problem. What if the IP is totally unique, and there are no viable comparisons?

The most common methods of establishing royalty percentages is the “25% rule.” This basically means that the owner of the IP is entitled to 25% share of the net sales or units sold. Following this method gives the IP holder a fair investment in his product, while still allowing the business owner the ability to invest in marketing this product with a good return.

Obviously, this is a very simplistic breakdown of the determination and payment of royalty fees on intellectual property. However, as each situation is unique, we encourage you to chat to the professionals.

Visit our website at The Property-Partnership East Rand to get the professionals on your side.