PPA Methodology

MPEEM vs Relief from Royalty: Choosing the Right Intangible Asset Valuation Method

FairValueX Team · 9 min read

Key Insight: MPEEM and Relief from Royalty are the two dominant methods for valuing intangible assets in purchase price allocations. Choosing the wrong method — or applying the right method incorrectly — is one of the most common PPA audit deficiencies. This guide covers when to use each, how they work, and what your auditor expects.

Multi-Period Excess Earnings Method (MPEEM)

How MPEEM Works

MPEEM starts with the total cash flows attributable to the business and isolates the portion attributable to a single intangible asset by deducting contributory asset charges — the economic returns required by all other assets that contribute to generating those cash flows.

Think of it this way: a company's revenue comes from the combined effort of its customer relationships, technology, brand, workforce, and working capital. MPEEM attributes a "rental charge" to each contributing asset and what remains are the "excess earnings" attributable to the primary asset being valued.

The MPEEM Calculation Steps

Project the cash flows associated with the intangible asset (e.g., revenue from existing customers)
Deduct operating expenses associated with serving those customers
Deduct contributory asset charges for: working capital, fixed assets, assembled workforce, trade name, developed technology
Apply a tax rate to get after-tax excess earnings
Discount the after-tax excess earnings at an asset-specific rate
Apply a tax amortization benefit (TAB) if the asset is tax-deductible

When MPEEM Is Appropriate

✓ Customer relationships — the most common use case
✓ Developed technology — when the technology is the primary revenue driver
✓ IPR&D — in-process research and development projects
✓ The asset is the primary intangible asset of the business

The "Primary Asset" Rule

MPEEM should only be used for one intangible asset per PPA — the primary asset. Using MPEEM for multiple assets creates double-counting problems because each MPEEM calculation deducts charges for the other intangible assets. This is a critical audit check.

Relief from Royalty Method

How Relief from Royalty Works

The Relief from Royalty method values an intangible asset based on the hypothetical royalty the company would have to pay to license it from a third party. Since the company owns the asset, it is "relieved" from paying this royalty — and the present value of that savings represents the asset's value.

The Calculation Steps

Identify the revenue base associated with the intangible asset
Apply a royalty rate (sourced from comparable licensing transactions)
Deduct taxes on the royalty income
Discount the after-tax royalty savings at an appropriate rate
Apply a tax amortization benefit (TAB) if applicable

When Relief from Royalty Is Appropriate

✓ Trade names and brands — most common use case
✓ Patented technology — where licensing comparables exist
✓ Software / developed technology — when used as secondary method
✓ Assets where licensing market data is available

Head-to-Head Comparison

	MPEEM	Relief from Royalty
Complexity	High (contributory charges are complex)	Moderate (royalty rate is key input)
Data Requirement	Detailed projections + all contributory assets	Revenue projections + royalty rate benchmarks
Primary Risk	Incorrect contributory asset charges	Non-comparable royalty rates
Audit Focus	Contributory charges, projection assumptions	Royalty rate selection, comparable analysis
Best For	Primary intangible (customer relationships)	Secondary intangibles (brand, technology)

Common Mistakes

Using MPEEM for multiple assets

Creates circular deductions and potential double-counting. Only one asset should be valued with MPEEM per PPA.

Missing contributory charges

Forgetting to charge for assembled workforce, working capital, or fixed assets. This overstates the primary asset value and understates goodwill.

Non-comparable royalty rates

Using royalty rates from a different industry, size tier, or technology lifecycle. Auditors verify the comparability of licensing transactions.

Ignoring the TAB

If the intangible asset is tax-deductible (asset deal), the tax amortization benefit can add 10-30% to the value. Omitting it understates the asset and overstates goodwill.

Decision Framework

Which method for which asset?

Customer relationships → MPEEM (primary asset)

Trade names / brands → Relief from Royalty

Developed technology (primary) → MPEEM

Developed technology (secondary) → Relief from Royalty

Non-compete agreements → With-Without

Assembled workforce → Replacement Cost (contributory asset only)

IPR&D → MPEEM with probability-weighted completion scenarios

Related Resources

Selecting the right intangible asset method?

Our PPA engagements document the method selection rationale for each identified intangible asset — pre-answering auditor questions.

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