CLP CLP Licensing Valuation & Financial Analysis 2 — Questions and Answers
Question 1: What is a milestone payment in a licensing agreement?
- A payment triggered by achieving a defined development or commercial event (Correct answer)
- A monthly fixed fee paid to the licensor
- A penalty for sublicensing without approval
- An advance against future royalties at signing
Correct answer: A payment triggered by achieving a defined development or commercial event
A milestone payment is a lump sum paid when the licensee reaches a specified event, such as regulatory approval or first commercial sale.
Question 2: The relief-from-royalty method calculates IP value based on:
- Royalties the owner is relieved from paying by owning the IP outright (Correct answer)
- The cost to recreate the IP from scratch
- Recent sale prices of comparable IP assets
- Projected EBITDA of the licensing business
Correct answer: Royalties the owner is relieved from paying by owning the IP outright
The relief-from-royalty method values IP as the present value of hypothetical royalty payments the owner avoids by owning rather than licensing the asset.
Question 3: Which term describes a royalty base computed on the selling price of only the smallest saleable unit that practices the licensed patent?
- Smallest saleable patent-practicing unit (SSPPU) (Correct answer)
- Entire market value rule
- Reasonable royalty base
- Per-unit royalty floor
Correct answer: Smallest saleable patent-practicing unit (SSPPU)
The SSPPU limits the royalty base to the component that actually embodies the patented feature, avoiding royalties on unrelated product value.
Question 4: A stacking royalty problem occurs when:
- Multiple licensors each charge royalties on the same product, making cumulative rates uneconomic (Correct answer)
- Royalty rates increase automatically year over year
- The licensee sublicenses to multiple sub-licensees
- Royalties are calculated on gross rather than net sales
Correct answer: Multiple licensors each charge royalties on the same product, making cumulative rates uneconomic
Royalty stacking happens when a product requires licenses from many IP owners, and the combined royalty burden exceeds what is economically viable.
Question 5: What does IRR represent when evaluating a licensing opportunity?
- The discount rate at which the NPV of deal cash flows equals zero (Correct answer)
- The ratio of royalty income to total revenue
- The annual growth rate of royalty payments
- The internal risk rating of the licensee
Correct answer: The discount rate at which the NPV of deal cash flows equals zero
IRR (Internal Rate of Return) is the discount rate that makes the NPV of all deal cash flows zero, indicating the deal's effective return rate.
Question 6: In a licensing deal, what is the purpose of a minimum annual royalty (MAR)?
- To ensure the licensor receives a guaranteed income floor even if the licensee undersells (Correct answer)
- To cap the total royalties paid over the license term
- To set the maximum running royalty percentage allowed
- To replace milestone payments in early-stage deals
Correct answer: To ensure the licensor receives a guaranteed income floor even if the licensee undersells
A MAR guarantees the licensor a minimum payment each year regardless of actual sales, protecting against low-effort commercialization.
CLP CLP Licensing Valuation & Financial Analysis 2
What is a milestone payment in a licensing agreement?