A firm with valuable Intellectual Property IP by having spent sums of money to develop manufacturing know-how, patents , or a trademark, can be expected to not only employ it for gain but to seek, by licensing it out: (a) to recoup part of the expenditure incurred on development (b) achieve such in the shortest period and (c) attempt to obtain a profit from each of the markets in which the IP will be employed to the gain of the licensee.
The royalty is not a single separate element but is a composite of the rate, the length of time over which it applies, the unit base of its calculation, the 'remaining life' of the licensed right (for instance, the balance life of a patent), supportive assistance and other contractual obligations.
If there are rival products or services available to the licensee, or if there are more favourable markets for the licensor, the compromising equation changes in context.
(See Guidelines for Evaluation of Transfer of Technology Agreements, United Nations, New York, 1979, pp 40).
A more elegant - and algebraic - way of looking at royalty payments is to attempt some form of consolidation of the quantitative variables in a licensing proposal (See Manual on Technology Transfer Negotiation, United Nations Industrial Development Organization, Vienna, Austria, 1996 pp.256, 1996).
It takes the case of a technology license where the royalty rate is 4% on sales value over 5 years, with rights to the licensee to continue operations beyond that period without further payment obligations.
For purposes of illustration, it is assumed that the annual sales volume and production cost are constant (later discussion allows for year-to-year changes): It is evident that in the 6th year, the Operating Profit of the enterprise increases by $4000.
The evaluation of Expression E and that of TTF provide estimates of commitments to the technology-offering party in accepting a license at a particular royalty rate (and a base for negotiations).
Thus, taxation rates do not come into play and it is possible to evaluate the impact of royalties independent of territory.
are generated from the 'compound interest' formula: where It then becomes possible to reformulate a stream of profits and royalties to their PVs.
Table B illustrates this methodology for evaluating the projected LSEP of an enterprise, where royalty has been made applicable for a period of 5 years.
The NPVs of OPR and R are $563,100 and $218,700, respectively, and thus, the projected LSEP is 0.28 i.e. the licensee shares 28% of the profits of the enterprise with the licensor over the five-year period.
The TTF of this projection is 2.6, implying that for every dollar of royalty paid, the OP to the licensee enterprise is multiplied by this factor.
Normal project calculations look beyond the royalty-bearing period evaluating both the NPV and the
The 'discount rate' used in capitalization of flows estimates the element of accepting risk in the projection of costs and incomes.
NSV is predominantly used when there are a multiplicity of products made or processed in some way (say, various thicknesses of plate glass in a glass-manufacturing license).
That is, once the transmission of the latter is completed, the licensor has no involvement with the licensee so long as the caveats and rights of the license are respected.
Where the transfer of know-how is solely the province of contract, the lumpsum often works as 'insurance' against misuse of know-how by the licensee, since there is no protective statute for it (unlike with patents and trademarks), while the 'running royalty' can be insurance for the licensee in that the licensor would provide inputs so as to maximize income (thus to the benefit of both).
They are of a specialized nature linked to the knowhow, for instance, procurement of equipment, the setup of a production facility or training of licensee personnel, on-site and off-site.
( See *Licensing Guide For Developing Countries', World Intellectual Property Organization (WIPO), 1977, Section H).
The cost of such services arises from delineating the skill-mix and 'man'-hours of effort involved (domestic and expatriate personnel) and providing for supervision overhead.