Page 15 - Master of Today (MOT) Publishing: Art Project by Petru Russu -Catalogue 2024

The cost approach:
The royalty is set at a level that will reimburse the intellectual property owner for its costs
over the life of the licence.

The comparable market approach:

The royalty is based on the royalty charged by others in comparable deals for comparable
technologies. The obvious flaw with this approach is that it can be difficult to find current,
reliable data for deals and technologies that are truly comparable.

The income approach:
The royalty is a share of the profit the licensee will receive as a result of taking the licence
and selling the licensed products. The ‘25% rule’ the most common type of income
approach is the ‘25% rule’.
This rule of thumb states that the IP owner is entitled to 25% of the licensee’s long term
pre-tax operating profit made from sales of the licensed products. The 25% share should
be expressed in the licence as a percentage of net sales, or a price per unit of licensed
product sold. Royalties should never be expressed in the licence as a percentage of
profits. Profits can often be manipulated by use of creative accountancy methods. For the
‘25% rule’ to be useful, the intellectual property owner needs to know what the licensee’s
projected revenues and expenses are. A prudent intellectual property owner will always
ask a prospective licensee to submit a business plan that includes revenue and expense
projections for the life of the licence. Those projections may need to be discounted to
take into account various risks, such as market indifference, technological changes and
competition in the market.

Example of the ‘25% rule’:
Party A licenses Party B to translation, reprint and sell a new book.
Party A is the author /publisher of the book. Party B’s long-term projections show that:
• Party B expects to sell the book for $100 plus tax each;
• Party B’s projected costs per unit over the long term are approximately $60, leaving a
pre-tax operating profit per unit of $40.
Under the ‘25% rule’, 25% of Party B’s $40 per unit profit should go to Party A. That is 10%
of the unit’s $100 sale price. So, Party A and Party B agree that Party B will pay a royalty of
10% of Party B’s net sales.

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