Expert: Kacey Cahill - 3/10/2009

Question
I am doing a feasibility analysis for a school project. We are trying to determine how much we would have to pay in royalties for selling pdf files of service manuals online. So is there a ballpark figure we could use to determine how much royalties would have to be paid?

Answer
Kasey (I don't think I have ever had a conversation with another Kasey -- we clearly could not be at the same party -- too confusing!)

Anyway, the answer is "what the market will bear"  If you can do some research into other products that have essential similarities to yours, you can get a jumping off point.  On the other hand, this is a brutal market and you represent cash flow, so who cares what past models may be.  I know some patent licensing markets, for instances, range from 2 - 6%. In other markets, book "publishers" in the self publishing market, charge 20% of retail just to do order fulfillment.  It is hard to know without looking directly into the market for your product/service. The (almost more important) analysis is the one where you determine when they get their cut -- off the top (%retail), percent gross profit (just take out the fees to produce the item) or at the bottom -- net income (every expense comes out).  The lower you go (the more expenses you take out) before you apply their %, the higher the % they get, because they are essentially making a long term investment your company -- "more skin in the game" as they say.  I can't imagine somebody buying into the net income number, but you should really try to bake some expenses in before you apply their %.  On the other hand, if you are going to make very little money in the beginning and you reasonably foresee much more in the future, you may want to swap some expenses for a smaller %.  
I am sorry if this is confusing, you are welcome to ask another clarifying question.  MANY MANY very smart people, focus too much on just that number and not the expenses taken out before the number is applied, and that is where a savy entity on the other side will take advantage.

I hope this helps, but please understand that this is intended for educational purposes only and not as legal advise.

Kind regards,

Kacey Cahill
Principal, Kacey Cahill Law
kcahill@kaceylaw.com
www.kaceylaw.com