The Value of a Font Buyout

Scott-Martin Kosofsky

I have a question regarding the value of a copyright buyout for a custom font. This subject has come up earlier on Typedrawers, but this case is a bit different. Here is the situation: 

I made a set of highly specialized custom fonts for a client under five-year exclusive licenses, with all the usual restrictions. Before the license period was over, the client, who sees the fonts as essential to their identity and future work over the next decade or two, expressed the desire to buy all rights to the fonts. 

On what basis does a designer establish the value of such a sale? Is there a formula that is customary in the type industry? If so, how does the type designer document this custom? Does anyone have cases I can cite?

Thanks in advance.

John Hudson

We recently encountered an almost identical situation: fonts were licensed for 3-year exclusive use, renewable for a further 3-years for an additional fee. When the client expressed the desire to purchase the rights, we negotiated in terms of multiples of that renewal fee. I think it is a good idea, whenever licensing term-limited exclusive use, to also include a renewal fee in the agreement, as this provides an upfront valuation of continued exclusive use for a given period of time, and hence a figure that both parties acknowledge as a basis for negotiating further extension or buy-out of rights.

I don't know on what basis other designers or foundries calculate the price of an IP buy-out. It is ultimately a negotiation, and in our recent case took a few weeks to reach an agreement. I don't want to provide details, but we proposed X times the renewal fee for a complete transfer of rights, they counter-proposed Z times, and unsurprisingly we settled on Y times. Be prepared to haggle.

Hrant Հրանդ Փափազեան Papazian

@John Hudson Since you're not revealing the client, can you not reveal what Y was? Failing that, what about the ratio of the 3-year extension fee to the original 3-year exclusivity fee?

Scott-Martin Kosofsky

Thank you for sharing this information, John—much appreciated. While it’s perfectly understandable that no one wishes to share private information, sharing the underlying principles can be very helpful to everyone.

In posing my question, I simplified the situation. In reality, it’s a bit more complicated and it has an aspect that could prove to be beneficial to some of you, not only those in the U.S. Here is the larger picture:

In 2010, I began work as designer and producer of a new prayer book for a major religious organization. The book required a somewhat narrower than normal Hebrew font that could accommodate the entire range of diacritics for liturgy and Bible, and so I was contracted to make one (a regular weight and a bold). The contract for the fonts stipulated that I was their sole owner, licensing them to the publisher only for this book and any other they hired me to work on, further stipulating that the term of exclusivity would be five years. A third font, a titling face of unrelated design, was added later. The prayer book was published in 2015, in an initial run of 250,000 sets (it is in two volumes). Through its projected 30-40-year lifespan, its numbers will likely more than double.

As the initial period of exclusivity was coming to an end, the publisher expressed a strong desire to acquire the fonts entirely. It is a necessity for them, really, as it is likely that they will need to use the fonts to update the books beyond my lifetime. (I am 63.) We  agreed upon a price for a five-year extension of the license, but the cost of a buyout (which I quoted as double) was too expensive. So, I came up with a plan to sell them the five-year license and, as they are a charitable organization, make the buyout portion of the agreement a contribution. The contribution would be tax-deductible to the extent provided by U.S. law.

The contribution of fonts as Intellectual Property is tricky, because it cannot be evaluated by the usual IRS-approved appraisers, so one must be able to document comparatives, if not by dollar amount, then by percentages that are considered normative in the industry. Also, one may not declare a user license as a contribution; you must hand over ALL rights. (For non-U.S. readers, “IRS” is the Internal Revenue Service, the American taxation bureau.)

Now that the additional five-year license agreement has been completed and signed, I’m looking for comparatives to present to the IRS to document the donation portion. The information I am looking for are formulas that have actually been used in similar transactions (not contributions, but commercial buyouts): e.g. x% of the price of the original license. I am not able to get this information from the attorney who worked on the license agreement, even though he has great experience in the industry, because IRS regulations prohibit using such information from anyone who was party to the transaction. It must come from an independent source (not necessarily a U.S. source).

Any information you can provide will be very helpful. Please feel free to contact me privately if you wish. I am prepared to pay a fee for any documentation you are able to provide, which will be held in strict confidence.

Ori Ben-Dor

What an interesting story!
Can you please show a sample of that font? Just out of curiosity (I'm Hebrew speaker).

John Hudson

Failing that, what about the ratio of the 3-year extension fee to the original 3-year exclusivity fee?

[correction] Renewal fee on this project was 68% of original fee (on another project it had been 1:1, but in that case the original fee was lower).

We proposed 4.5x the 3-year renewal fee for the buy out; they countered with 2.5x, and we settled on 3.4x. This is probably of limited use for Scott-Martin, though, since I'm not at liberty to disclose actual amounts, and there are too many individual factors involved in negotiations. In this case, there were concerns on both sides about local taxes and currency exchange rates, and finding an appropriate balance took a long time.

I consider such a negotiation a success if both parties end up equally disappointed.

Scott-Martin Kosofsky

John, this very helpful—and generous of you, as always. This has been a happy negotiation all around. I suspect that’s because the two parties have work to do together for some years to come. And in this way, my client has the insurance they need.

The tax deductibility was so novel to me, and fell into such a gray area, that I wouldn’t trust the word of a lawyer or accountant. Instead, I read all the relevant IRS rulings I could find and got in touch with the upper echelons at the legal offices of the IRS to ask the questions directly. I’m glad I did; they were very helpful and saved me the pain of writing the agreement incorrectly, thereby costing me all that I might have gained by taking the deduction.

If anyone else has experience to share, I would be very happy to hear about it.

Hrant Հրանդ Փափազեան Papazian

@John Hudson Thank you for your generosity with the details. Those are some encouraging numbers (although it's possible your client was more into longevity than is typical).