For a given prospective technology licensee, its maximum affordable royalty rate is a calculable value. Here is an overview of this “MARR” approach, as used in casework with both sellers and buyers of technology-based IP.

1. MAXIMUM AFFORDABLE
ROYALTY RATE –
A USEFUL AND
UNDERUTILIZED IP
VALUATION METHOD

2. P O R T A L T E C H C O . | 2 0 2 0
CHALLENGE
You have software and hardware
patents that are licensable to as many
as a dozen different prospective
licensees already established in the
industry. You have reason to believe
that your patent portfolio could
become a standard in the industry.
How do you determine a royalty rate
to maximize your royalty income?

3. Approach
1. Think of the adoption of your
patented technology as a new
commercialization project within
each of the prospective licensee
companies.
2. Evaluate each prospective
licensee’s projected discounted
cash flow resulting from
commercial use of the
technology.

4. Approach
3. Include in the financial model
a line item for royalty payment.
4. The maximum affordable
royalty rate (MARR) is the value
of the royalty payment,
expressed as a % of net project
revenues, that allows the NPV of
the project to meet the
company's established financial
hurdle rate.

5. A Strategy to
Maximize Income
This technique of financial
modeling to arrive at
maximum affordable royalty
rates company by company
is that you now have a
starting point for developing
and quantitatively assessing
various licensing (and sub-
licensing) strategies for
impact on licensing income.

6. Discrete scenarios
to consider
Establish your
technology as an
industry standard
via licensing to as
many prospective
licensees as possible.

7. Discrete scenarios
to consider
“Outsource” licensing by
allowing sub-licensing to
one primary licensee,
perhaps the one
company that can afford
to pay the highest
royalty, based on its
financial model.

8. Discrete scenarios
to consider
Limit the
licensees to
those companies
with the fastest
time to market.

9. LESSONS LEARNED
FROM CASE STUDIES
The maximum affordable royalty
rate can vary widely across
different companies in the same
industry. In one case involving
storage area network
technologies, the royalty rates
ranged from 3% to 20% of the
annual revenues of the
prospective licensees.

10. LESSONS LEARNED
FROM CASE STUDIES
Inputs to the financial model can
be based on public information as
well as industry expert judgement
regarding revenue growth rate,
internal discount rates, and the
percentage of total company
revenues attributed to products
embodying the technology.

11. LESSONS LEARNED
FROM CASE STUDIES
For prospective companies
with negative free cash
flow, affordable royalty
rates can be assumed equal
to those of peer companies
with positive cash flow.

12. CONTACT US
Use of MARR has been
particularly helpful to
companies with valuable
technology-based IP but little to
no experience in licensing.
Interested in finding out how
MARR can help you, too?
Contact us:
www.prakteka.com/contact-us/

13. Reference: DCF Analyses in Determining
Royalty, Daniel Burns, les Nouvelles, Journal
of the Licensing Executives Society,
September, 1995, accessed November 7, 2018,
http://www.danielburnsassociates.com/wp-
content/uploads/2011/08/DCFAnalysisInDeter
miningRoyalty.pdf

14. Follow us on Twitter
https://twitter.com/prakteka
Coyright 2018
All rights reserved
And for more on what matters when you’re
working at the technology/business
interface, see our content on technology
assessment, technology commercialization,
technology valuation, and “seeing the
future” on our website:
https://www.prakteka.com/