Royalty rate negotiators should not throw out the 25% rule


Though the courts have ruled out use of the 25% Rule as a basis for determining reasonable royalty, should negotiators of royalty rates shun the formula as well?

Jonathan E. Kemmerer and Jack Lu of KPMG say no, it can be quite useful as starting point in the royalty rate negotiations of a licensing deal, though 25% of the EBITDA may be more statistically significant.

Furthermore, in a 2012 white paper, the authors defend licensing negotiations as an efficient market, suggesting that valuation analysts' pursuit of comparable licenses is a worthwhile exercise.

Regression analyses indicate that there is a linear relationship between reported royalty rates and various profitability measures, which suggests that the licensing market is efficient and that cost structure and profitability across industries have been factored into royalty rate negotiation.


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