Royalty Rate Assessment - Royalty Rate and The Technology Turnover Concept

Royalty Rate and The Technology Turnover Concept

A more elegant - and algebraic - way of looking at royalty payments is to attempt some form of consolidation of the quantitative variables in a licensing proposal (See Manual on Technology Transfer Negotiation, United Nations Industrial Development Organization, Vienna, Austria, 1996 pp.256, 1996).

Table A demonstrates one form of consolidation.

It takes the case of a technology license where the royalty rate is 4% on sales value over 5 years, with rights to the licensee to continue operations beyond that period without further payment obligations. For purposes of illustration, it is assumed that that the annual sales volume and production cost are constant (later discussion allows for year-to-year changes):

Table A. Schematic of Incomes and Cost Flows
Unit:'000$
Year --> 1 2 3-5 6
Sales 100 100 100 100
Cost of Production 40 40 40 40
Royalty Due,R 4 4 4 0
Total Cost 44 44 44 40
Operating Profit OPR 56 56 56 60 OP

It is evident that in the 6th year, the Operating Profit of the enterprise increases by $4000.

The higher value of the Operating Profit in the 6th year would not be apparent if assessment was limited to the first 5 years of royalty commitment.

Algebraically,

LSEP= R/(OPR+R) - C

where:


Expression C can be rewritten as:

LSEP = 1/ (1 + OPR/R) - D

or as

LSEP = 1 / (1+TTF) - E

where TTF is defined as the Technology Turnover Factor. It is a measure of the profit or return that the enterprise obtains for a unit of royalty payment - the profit accelerator. A high TTF implies a lower share of enterprise profit flows to the licensor (and conversely, a higher share to the licensor when the TTF is small). The evaluation of Expression E and that of TTF provide estimates of commitments to the technology-offering party in accepting a license at a particular royalty rate (and a base for negotiations).

Expression C also defines the term 'profit' for this analysis; it is the profit before tax during the royalty-bearing period and not that of the post-royalty period. Thus, taxation rates do not come into play and it is possible to evaluate the impact of royalties independent of territory.

Of course, in normal business practice, royalty rates take on different forms, while sales, costs and profits vary from year to year. Unless they can be consolidated to single numbers, the practical use of Expressions (D) and (E) would not be feasible. This can be done by converting all cash flows to their 'Present Value'.

Read more about this topic:  Royalty Rate Assessment

Famous quotes containing the words royalty, rate, technology and/or concept:

    “Powerful, yes, that is the word that I constantly rolled on my tongue; I dreamed of absolute power, the kind that forces to kneel, that forces the enemy to capitulate, finally converting him, and the more the enemy is blind, cruel, sure of himself, buried in his conviction, the more his admission proclaims the royalty of he who has brought on his defeat.”
    —Albert Camus (1913–1960)

    “We all run on two clocks. One is the outside clock, which ticks away our decades and brings us ceaselessly to the dry season. The other is the inside clock, where you are your own timekeeper and determine your own chronology, your own internal weather and your own rate of living. Sometimes the inner clock runs itself out long before the outer one, and you see a dead man going through the motions of living.”
    —Max Lerner (b. 1902)

    “Primitive peoples tried to annul death by portraying the human body—we do it by finding substitutes for the human body. Technology instead of mysticism!”
    —Max Frisch (1911–1991)

    “Modern man, if he dared to be articulate about his concept of heaven, would describe a vision which would look like the biggest department store in the world, showing new things and gadgets, and himself having plenty of money with which to buy them. He would wander around open-mouthed in this heaven of gadgets and commodities, provided only that there were ever more and newer things to buy, and perhaps that his neighbors were just a little less privileged than he.”
    —Erich Fromm (1900–1980)