The 25 Percent Rule Still Rules: New Evidence from Pro Forma Analysis in Royalty Rates

Licensing Economics Review, April 2010

Les Nouvelles, March 2011

Posted: 1 Apr 2010 Last revised: 12 Jul 2011

See all articles by Jack Lu

Jack Lu

Intellectual Property Market Advisory Partners(IPMAP), LLC

Date Written: December 25, 2009

Abstract

The 25% rule is a creative and useful rule of thumb for royalty determination. However, the recent efforts in empirically proving its validity have not been very impressive. In this short essay, I revisit the regression studies in Kemmerer and Lu (2008), and conduct pro forma analysis by correcting the data mismatching and adding back hypothetical “actual royalty payments”. It seems that the use of historical data over-estimated the coefficients and led to the inconformity with the 25% rule in that earlier study. The analysis in this essay shows that the coefficients of EBITDA margin converge with the 25% rule when pro forma profit margin is used. More importantly, the analysis suggests that royalty rate determination can reasonably start with 25% of EBITDA margin or 33% of EBIT margin.

Keywords: Royalty Rate, Profitability, The 25% Rule, Regression Analysis, Pro Forma Analysis, Linear Relationship, Royalty Negotiation, Profit Margin

JEL Classification: O32, O34, C13

Suggested Citation

Lu, Jiaqing, The 25 Percent Rule Still Rules: New Evidence from Pro Forma Analysis in Royalty Rates (December 25, 2009). Les Nouvelles, March 2011. Available at SSRN: https://ssrn.com/abstract=1570143

Jiaqing Lu (Contact Author)

Intellectual Property Market Advisory Partners(IPMAP), LLC ( email )

13785 Research Blvd,
Suite 125
Austin, TX 78750
United States
(512)238-3088 (Phone)

HOME PAGE: http://www.ipmapllc.com

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