Meaning
Comparative valuation logic that estimates the fair market rate for an asset by comparing it to hypothetical third party royalty agreements. The license analogy model uses external market data to build a proxy for the value of proprietary technology or brands. It assumes that the worth of an asset is equal to the present value of the royalty payments a company would be willing to pay if it did not own the item.
Comparative Method
Analysts identify similar agreements within the same industry to establish a range of standard rates. Under the license analogy model, the specific terms of these benchmarks (including exclusivity and duration) are adjusted to fit the asset being studied. This process filters out the noise of unrelated business deals to find a clean price for the intangible property.
Royalty Projection
Revenue forecasts are multiplied by the selected rate to determine the annual benefit of the asset. The license analogy model then discounts these future sums back to the present day using a risk adjusted rate. This calculation provides a defensible figure for use in tax filings or merger negotiations where no direct sales data exists.
Pricing Framework
Resulting value is checked against the cost of developing a replacement or the income lost if the asset were removed. A license analogy model functions as the primary tool for settling disputes over patent infringement damages. It offers a structured way to quantify the economic contribution of a single component within a larger product.
