Profit Split Method (2024)

The Profit Split Method is one of the valuation methods used to estimate the fair market value of an intangible asset such as a technology license. The main assumption under this method is the splitting of anticipated profits from using technology between the licensor and the licensee. The rule of thumb is for the licensor to receive a royalty ranging between 25% to 33.3% of the operating profit, where operating profit is defined as income less selling, general and administrative overhead expenses associated with the product that will apply the licensed technology invention. Interest income, interest expenses and income taxes are excluded in the computation of operating profit consideration. Licensees retain 66.7% to 75% of net operating profit from using technology to compensate for taking greater risks associated with the operations of the business including investing in capital assets, manufacturing the products and handling the regulatory, organisational, human resources, distribution, marketing, and customer relations required to commercialise a patented technological invention.

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