Alteris LLC and its affiliates have valued and tracked IP values over the years for purposes of M&A, financial reporting and litigation support.
Intellectual Property (IP) is often one of the most valuable assets that a company can possess. The importance of IP assets to individual companies has grown tremendously over the last decades.
Traditionally, royalty payment agreements are usually expressed as a percent of sales. Gross or net with net being the most common. This is because of simplicity. If profit based agreements are used complications can arise from other factors.
In recent years, alternate forms of royalty payment other than sales have increased. Costs have increased making sellers of IP more sensitive to profits. Still, net sales is the most common metric.
Over all types of IP, the average annual royalty rate peaked in 2010 at a little over 15%. In 2014 it dropped to about 9%. The annual royalty rate has increased in the years since then, and recently is about 13.2%. This increase probably reflects an improving economy.
The above statistics are averages, but most IP licensing/royalties are from a small number of industries. The largest five industries produced 46% of activity. In 2016 the top five produced 55%.
The industries that seemed to have suffered the most in the severe recession around 2008 was pharmaceuticals and biotech. But those have recovered. The services industries – both consumer and business have not recovered. In other words, older industries – legacy industries – are not as active as biotech/pharma.
Service agreements have been reduced including development and software. There is an increase in manufacturing and process intangible agreements during that same time. In particular, the number of marketing IP agreements has increased. This might be caused by M&A activity.
Generally, the types of IP licensing agreements have become more diverse in recent years. This may be a sign of confidence in business conditions. While it has varied by industry and in magnitude, IP licensing agreements seem to have recovered from the 2014-2015 decline.
In summary, we have noticed that IP licensing activity and rates are affected by economic conditions and business confidence. Economic activity both strong and weak affects these IP valuations also.
