CLP CLP Licensing Valuation & Financial Analysis 1 — Questions and Answers
Question 1: Which valuation method estimates the value of a license by comparing it to similar transactions in the marketplace?
- Market comparable approach (Correct answer)
- Income approach
- Cost approach
- Relief-from-royalty method
Correct answer: Market comparable approach
The market comparable approach values a license by referencing similar arm's-length transactions in the market.
Question 2: The '25% rule of thumb' in licensing suggests the licensee should pay the licensor approximately what share of gross profits as a royalty?
- 25% (Correct answer)
- 10%
- 50%
- 75%
Correct answer: 25%
The 25% rule of thumb holds that a licensee should pay roughly 25% of expected gross profits to the licensor as a royalty.
Question 3: What does NPV stand for in the context of licensing deal financial analysis?
- Net Present Value (Correct answer)
- Net Profit Value
- Nominal Price Valuation
- New Product Value
Correct answer: Net Present Value
NPV (Net Present Value) discounts future cash flows to their present-day worth to evaluate a deal's financial merit.
Question 4: A running royalty in a license agreement is best described as:
- A percentage of sales paid periodically over the license term (Correct answer)
- A one-time upfront payment at signing
- A fixed annual fee regardless of sales
- A payment triggered only upon patent grant
Correct answer: A percentage of sales paid periodically over the license term
A running royalty is a per-unit or percentage-of-revenue payment made to the licensor over time as the licensee sells products.
Question 5: Which financial metric measures the minimum sales volume a licensee must achieve before royalty payments cover a fixed upfront license fee?
- Break-even point (Correct answer)
- Internal rate of return
- Payback period
- Gross margin
Correct answer: Break-even point
The break-even point is the sales volume at which cumulative royalties equal the upfront fee investment.
Question 6: In the income approach to IP valuation, what primary element is discounted to determine value?
- Future incremental cash flows attributable to the IP (Correct answer)
- Historical R&D expenditures
- Current book value of assets
- Comparable market sale prices
Correct answer: Future incremental cash flows attributable to the IP
The income approach discounts projected future cash flows that are specifically attributable to the intellectual property being valued.
CLP CLP Licensing Valuation & Financial Analysis 1
Which valuation method estimates the value of a license by comparing it to similar transactions in the marketplace?