How is a brand or trade name valued in a purchase price allocation using the relief-from-royalty method?

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AcadiFi · Accepted Answer

Brand and trade name intangibles are valued using the **relief-from-royalty (RFR) method** — one of the most widely used techniques in PPA intangible valuations. The logic is elegant: what would the acquirer have to pay in royalties if it didn't own the brand?

**The Relief-from-Royalty Framework**

The method estimates fair value as the present value of hypothetical royalty payments saved by owning the brand outright:

1. Project revenue associated with the brand
2. Apply a market-derived royalty rate
3. Tax-effect the royalty savings
4. Discount to present value

**Worked Example — Crestview Beverages acquires Solara Juices:**

Solara's branded product line generates $85 million in annual revenue, growing at 4% per year. Comparable licensing transactions in the beverage industry suggest a royalty rate of 5.5%.

| Year | Revenue | Royalty (5.5%) | Tax @ 25% | After-Tax Savings | PV @ 13% |
|---|---|---|---|---|---|
| 1 | $88.4M | $4.86M | ($1.22M) | $3.65M | $3.23M |
| 2 | $91.9M | $5.06M | ($1.26M) | $3.79M | $2.97M |
| 3 | $95.6M | $5.26M | ($1.31M) | $3.94M | $2.73M |
| 4 | $99.4M | $5.47M | ($1.37M) | $4.10M | $2.52M |
| 5 | $103.4M | $5.69M | ($1.42M) | $4.26M | $2.32M |
| Terminal | — | — | — | — | $22.83M |
| **Total FV** | | | | | **$36.60M** |

**Determining the Royalty Rate**

The rate comes from:
- Comparable licensing agreements in the same industry
- Profit-split analysis (brand's share of total profits)
- Industry databases (e.g., RoyaltyStat, ktMINE)
- Typical ranges: Consumer goods 3-8%, Technology 2-6%, Pharma 4-10%

**Finite vs. Indefinite Life**

| Classification | Criteria | Example |
|---|---|---|
| **Indefinite-lived** | No legal, contractual, or economic limit on useful life; brand expected to generate CF indefinitely | Major consumer brands (Coca-Cola type) |
| **Finite-lived** | Brand tied to specific product lifecycle, technology, or contractual term | Niche or generation-specific brands |

Indefinite-lived brands are **not amortized** but tested for impairment annually. Finite-lived brands are amortized over their estimated useful life.

**Exam Tips:**

1. RFR is the go-to method for brands, trade names, and trademarks.
2. The royalty rate is the most subjective input — small changes materially affect value.
3. Know the difference between indefinite-lived (no amortization, annual impairment test) and finite-lived treatment.
4. Under US GAAP, a defensive intangible (brand acquired to retire it) is still recognized and amortized.

Our CFA Level II course covers all major intangible valuation methods with practice cases.

How is a brand or trade name valued in a purchase price allocation using the relief-from-royalty method?

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