The attraction of this method is that it is based on commercial practice in the real world. It involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting estimated future, post-tax royalties, to arrive at a NPV.
Brand Finance uses the 'Royalty Relief' method for the following reasons:
- It is favored by tax authorities and the courts because it calculates brand values by reference to documented, third-party transactions.
- It follows the same principles as a discounted cash flow so can be readily understood by those with a business valuation background or other financial audiences.
- The input assumptions can be replicable and transparent, with the most contentious assumptions being the royalty rate applied and the useful economic life.
- It can be done based on publicly available financial information.