Quantifying brand licensing rates for a global business-to-business conglomerate
B2B Conglomerate
Office: London
An international B2B business asked Interbrand to recommend royalty rates to be charged to operating entities within the group for the use of its master brand. The task was complicated by the size and complexity of the enterprise, which operated across numerous sectors and countries. In addition, the business employed a variety of brand architectures, making greater or lesser use of the master brand alongside other brands in its portfolio.
We began by clustering different business units for analysis based on the extent of their connection to and use of the master brand, as well as how much of their business was in the brand’s home market (where it was significantly stronger than elsewhere). For each of these clusters we identified the brand-related intangibles being used, and which part of the group was responsible for creating and developing these assets.
We then conducted an extensive search for comparable licensing agreements across several databases in order to identify a short list of agreements that were sufficiently comparable to be used as benchmarks.
Finally, we determined three levels of royalty rates and established criteria for determining which rate would be applicable based on:
1. Brand architecture—level of use of the master brand
2. Strength of the master brand in the market (taking geographic proximity to the home market into account)
3. Profitability of the business Based on these royalty rates, we also conducted a valuation of the brand using the royalty relief methodology*.
Our findings were presented to the head of tax and his team and have been implemented to set royalty rates for the brand across the business.
*The royalty relief approach is based on an estimation of the royalties the brand owner would have to pay if it were the licensee of the brand rather than the owner. It involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting the estimated future, post-tax royalties, to arrive at a net present value, which is considered to represent brand value. The royalty relief approach does not yield the brand management insights that Interbrand’s proprietary methodology does, but we occasionally use it for financial valuations or as a secondary, supporting methodology.