A ‘Rule of Thumb’ exists within the licensing industry which states that, on average, a licensee would expect to pay approximately 25%-40% of its expected pre-tax profits for access to the Intellectual Property (which could include brands) attached to the license itself.
Often refered to as the 'Rule of 25%' it is commonly referred to in transfer pricing studies and legal cases and is supported empirically (Robert Goldscheider, John Jarosz & Carla Mulhern, ‘Use of the 25% Rule in Valuing IP’, 37 Les Nouvelles 123-124 (December 2002)). The theory behind the Rule of 25% is that whilst both licensor and licensee should share in the profits resulting from the IP being licensed, it is usually the licensee that takes the majority of profits for its role in exploiting the property, bearing risk and providing a return on the other assets in its business.
It should be noted that following a US judgement in 2011, the Rule of Thumb cannot be used as the basis for patent damage in the US. Its use in valuations should always be corroborated with other analysis where possible.
