As pioneers in supplying market-based royalty rates, we continue to investigate leading edge technology to advance and offer quality information for everyone. Our services and datasets continue to evolve and leverage technology change. We now introduce Artificial Intelligence (“AI”) built royalty reports.
AI-Powered Intellectual Property Search Platform
We employed our patented semantic search clustering and classification platform techniques to develop quality clusters to train our AI or machine learning algorithm to assemble intellectual property (“IP”) royalty reports.
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The algorithm understands different words can be a part of the same target IP category. For example, word relationships such as backpack and knapsack, footwear and tennis shoes, outerwear and jacket are understood to create a report targeting apparel technology and/or trademarks. Finally, highly correlated IP licenses, patents and non-patent literature are assembled from our custom datasets and included in a pre-built IP royalty report.
Why a Pre-Built Report?
AI built IP royalty reports organize the most relevant content in a simple format to develop a quick IP asset, license and literature landscape. The current dataset collection was used to build over 1,800 technology reports. Additional reports addressing trademark, copyright, and franchise agreements are also available.
What information is detailed in the Report?
The final report provides access to full text patent information, relevant non-patent literature and IP transaction information. IP transactions are summarized in an abstract format that includes:
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A summary of the property licensed or purchased
Compensation details, including royalty or lump-sum payments
Names of the Parties to the agreement
Deal structure elements,and
Access to information sources including full text contracts
Who is IPSCIO?
As an introduction, look at where we are today and how we got here. We are pioneers in assembling and organizing IP transaction information and continue to clear a path to IP Value Discovery.
A recent Forbes article reported the latest fair market value estimates of Major League Baseball teams. The team values ranged from the Miami Marlins at $0.980 billion to the New York Yankees at $5.0 billion. Forbes notes that…
“Our team values are enterprise values (equity plus net debt) calculated using a multiple of revenue. The multiples are based on historical transactions and the future economics of the sport and team. Revenue and operating income (earnings before interest, taxes, depreciation and amortization) measure cash in versus cash out (not accrual accounting) for the 2019 season.
Our figures include the postseason and are net of revenue-sharing and stadium debt payments for which the team is responsible. Revenues include the prorated upfront bonuses networks pay teams, as well as proceeds from non-MLB events at the ballpark. Ownership stakes in regional sports networks, as well as related profits or losses, were excluded from our valuations and operating results. Sources include sports bankers, public documents like leases and filings related to public bonds and media rights.”
A Closer look at Valuation
Forbes uses a common valuation method known as the market approach.This approach does not need a formal introduction since it is often used to develop residential real estate values when we buy and sell our homes. The underlying assumptions when applying the approach are less obvious. They include the following.
There are enough market transactions to observe and they are current.
The market transactions are comparable. In other words, the market transactions are in the same industry and impacted by the same market vagaries. If not, then adjustments may be necessary to effect comparability.
The market transactions represent an arm’s length transaction. In other words, the market price was the result of an agreement between a willing buyer and seller.
This method can have its roots in another common valuation method, the income approach. In this approach, value is linked to how much money you can make by owning an asset. If a transaction is completed based upon a value developed using an income approach, then the market and income approaches are related.
Uncovering value using the income approach requires estimating four essential components. These include:
the amount of future economic benefits
the pattern of receiving the benefits
the economic life of the benefits, and
the risk of receiving the benefits.
Economic benefits are typically measured by revenue and some measure of income.
The resulting measure of value, after estimating these components, is equal to the calculated present value of future benefits. In this approach, it is important to note that a value estimate is more influenced by the receipt of recent benefits than benefits received further the future.
As noted by Forbes, “future economics of the sport and team” are relevant to the value of the MLB teams, or any sports team.
Let’s take a closer look at the coronavirus effect on these economic benefits and resulting team values.
Forecasting Economic Benefits
Important to the start of any estimate of value is forecasting revenue and expenses.
Timing related to the restart of sporting events and shifting opinions and behaviors of American sports fans ultimately impact the economic benefit measures and lead to swings in team values.
Season and conference tournament cancellations and postponements will have an immediate and measurable impact on these benefits, of course, but for how long? Resuming sporting events will depend upon the timing associated with controlling the coronavirus.
Will these forecasted benefits also be impacted by sports fans losing interest and substituting other past times or will interest revert quickly to historical levels? Insight into answering this question and related demographic data are offered in the SSRS/Luker on Trends Sports Poll.
A review of responses to a couple of survey questions about fan behavior demonstrates the importance of this input to forecasting benefits and value.
Even after the postponement of seasons, more than 50% of all Americans still said they wanted to watch sports to take their mind off the news. This demonstrates that recovery from the current decline in benefit measures are likely short-lived and will recover to historical levels after sports resume.
Historical levels of viewing interest by AVID fans is likely to recover after sporting events resume. Viewing interest by other fans may represent a possible loss given higher interest in other activities such as Offline, TV/Movies, Online and Video Games, but any loss here represents a small portion of the viewing market.
Age demographics show that young Americans (ages 18–34) are more likely to have greater interest in other activity options compared to 35–54 and 55+ older fans. Likely, the longer it takes for sporting events to resume, the greater chance the young folks will find other things to take its place and impact benefit measures.
This brief review of the robust survey results offered in the SSRS/Luker on Trends Sports Poll points to some fan base dwindle by age group and fan type, but also points to a relatively quick return of interest upon resuming sporting events.
The delay in resuming sporting events plus uncertainty of fan interest returning impacts the pattern of receiving future economic benefits and the risk of receiving those benefits. Recall that the weight of receiving benefits early in a forecast has greater value influence than benefits received later in the forecast. The early benefit right now is much lower than expected. Further, the Sports Poll responses point to an increased risk of fans returning to historical habits. It is apparent that team values currently face a decline.
Keep track of these survey results that continue to be updated during the social distancing caused by the coronavirus at SSRS/Luker on Trends Sports Poll and IPSCIO’s comments.
As noted in our “Trademark Royalty Rates in Franchise Agreements” article, technology licensing typically dominates our collection efforts at IPSCIO/RoyaltySource. Trademark licensing is active, but typically only in areas of consumer-facing goods such as food, beverage, restaurant and apparel. We see very little business-facing trademark licensing activity as well as other consumer-facing services.
To expand the availability of market-based trademark royalty rates to use in a trademark valuation or license negotiation, we offered insights into unbundling composite trademark and technology royalty rates detailed in license agreements. In other words, we will offer benchmarks to help split the royalty rate between technology and trademark.
Broad Use of Bundled License Agreements
Understand that using a composite royalty rate as a market-based indication of a trademark royalty rate requires judgement. The first step is to carefully examine the license terms in order to clearly understand what rights are being granted to the licensee. It is also important to understand the nature of the licensee’s business as an aid to judging what are the most important needs of the licensee that are being satisfied by the license. We must remember that it is the responsibility of the trademark owner to ensure that the products or services rendered by a licensee maintain the quality standards that customers have come to expect. Hence, there are almost always additional elements such as trade secrets, know-how, procedures or a patent in the license bundle.
Lacking data that can help identify the trademark portion of the rate, you can simply view the rate as a ceiling or the maximum a licensor could charge for the use of a trademark. It is also helpful to simply split the rate 50%-50%. These two suggestions, while not perfect, do supply boundaries to consider and offer a check on the reasonableness of selection of a rate by using another method.
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Bundled License Agreements
We have reviewed licenses that bundle the rights to technology and trademark included in the IPSCIO/RoyaltySource database for market-based indications of a split between trademark and technology. We found one example.
The license agreement is dated July 24, 2002 and was still active as of February 2019. The parties to the agreement are Land O’Lakes, Inc. and Dean Foods Company. In general, Land O’Lakes, Inc. granted exclusive rights to use the “Land O’Lakes” brand and the “Indian Maiden” logo on dairy products.
Land O’Lakes is a producer of dairy products, animal feed and crop seed in the United States and their product brands are well-recognized. The dairy brands include Land O’Lakes, Alpine Lace, Lake to Lake and New Yorker brands and the Indian Maiden logo. Land O’Lakes also relies on patents and trade secrets to market and protect their products. Recipes and production methods for dairy and spread products are considered valuable trade secrets.
Dean Foods offers a variety of branded and private label dairy and dairy case products. These include fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products. Dean Foods also relies on a combination of trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to their market products and protect their intellectual property rights.
Some License History
Dean Foods acquired the “Upper Midwest” operations of Land O’ Lakes on July 10, 2000, including assets used to process milk, juice, cottage cheese, dips and other related products and executed their first trademark license agreement with Land O’ Lakes. The license was exclusive, perpetual, royalty-free and included the United States territory. Given the royalty-free provision, likely the purchase price included a lump sum amount representing a “paid-up” license.
Table 1
Two years later, on July 24, 2002, Land O’ Lakes and Dean Foods revised the license agreement. The license territory was expanded to include Canada and Puerto Rico. The exclusive, perpetual and royalty-free provisions for the original “Basic Dairy Products” remained the same. However, new “Value-Added Products” were included with defined royalty payments. Table 1 summarizes the licensed products.
The surviving royalty-free provision for the Basic Dairy Products supports the observation that the original trademark license was “paid-up” and included in the purchase price. The Value-Added Dairy Products royalty payments are detailed in Table 2.
Table 2
A premium royalty rate of 3% was negotiated for “shelf-stable” products. Land O’ Lakes has experience with aseptic and extended shelf-life product technology and expanded it through a joint venture relationship formed in 2001. Aseptic technology creates shelf-stable products using a sterilization process which allows product storage for prolonged periods without refrigeration.
Summary
While not specifically stated in the public documents reviewed, the information collected are puzzle pieces and connecting them allows a view into a technology royalty rate premium over a trademark royalty rate. The technology premium seems to be supported by the specialized production and packaging processes related to extending the shelf-life of food or for food to be stored without refrigeration until opened.
In this case, a royalty rate technology premium of 1.5% for the Value-Added products is evident (3.0% shelf-stable less 1.5% refrigerated), resulting in a 50% premium. This premium, and its inverse 50% (1- 0.50) helps unbundle the composite royalty rate paid for the use of trademarks and technology.
We now have two benchmark adjustments which can help to expand the number of royalty rates observations when addressing the value of a trademark. Our “Trademark Royalty Rates in Franchise Agreements” article noted that 44% of the composite franchise royalty rate relates to trademark. Combined with this Land O’ Lakes/Dean Foods observation, the benchmark adjustment ranges from 44% to 50%.
Obviously, the benchmark adjustments also work to expand the number of observable royalty rates used to value technology. The range for technology is 50% to 56%. In other words, 56% (1- 0.44) relates to the other intangible property such as know-how and procedures to operate the business in a franchise agreement.
Technology licensing typically dominates our collection efforts at IPSCIO/RoyaltySource. Trademark licensing is active, but typically only in areas of consumer-facing goods such as food, beverage, restaurant, retail store and apparel. We see very little trademark licensing activity focused on business-facing goods and services as well as other consumer-facing services.
To expand the availability of market-based trademark royalty rates to use in a trademark valuation or license negotiation, we collect franchise agreements. Why are franchise agreements useful? They are useful because included in the bundle of intangible property licensed in a franchise agreement is the right to use a trademark. In other words, a franchisor licenses a trademark with a bundle of other intangible property such as know-how, procedures, business model and rights to sell its branded products and services to a franchisee. In return, the franchisee pays fees that typically include a royalty payment measured as a percent of sales.
Since there are few “pure” trademark transactions available in the business segments listed below, franchise royalty rates in these segments can be used as a guide to develop a trademark royalty rate.
Broad Use of Franchise Agreements
Using a franchise royalty rate as a market-based indication of a trademark royalty rate requires judgment. The first step is to carefully examine the franchise terms in order to clearly understand what rights are being granted to the franchisee. It is also important to understand the nature of the franchisee’s business as an aid to judging what are the most important needs of the franchisee that are being satisfied by the deal. We must remember that it is the responsibility of the trademark owner to ensure that the products or services rendered by a franchisee (licensee) maintain the quality standards that customers have come to expect. Hence there are almost always additional elements such as recipes, know-how or procedures in the franchise “package.”
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Lacking specific data that can help identify the trademark portion of the franchise royalty rate, we can simply view that rate as a ceiling or a maximum a licensor could charge for the use of a trademark. It is also helpful to simply split the rate 50–50. These two suggestions, while not perfect, do supply boundaries to consider and offer a check on the reasonableness of selection of a rate by using another method.
Only One Market-Based Transaction
We have reviewed the franchise agreements and trademark licenses included in the IPSCIO/RoyaltySource database for indications of a split between trademark and other intangible property. We found one market-based example.
Detailed in the February 22, 2000 Krispy Kreme Doughnuts, Inc. Form S-1 Registration Statement, we discovered that Krispy Kreme in-licensed the U.S. and Foreign registered and unregistered Krispy Kreme trademark family and built a franchise business.
A Little History
Krispy Kreme is a specialty retailer of doughnuts made fresh in stores. The first store opened in 1937. As of October 31, 1999, there were 141 Krispy Kreme stores in the United States consisting of 59 company-owned and 82 franchised stores. By early 2016, there were 116 company-owned stores and 1,005 franchised stores worldwide. On July 27, 2016, Krispy Kreme merged with Cotton Parent, Inc. and its securities registration was terminated, limiting further public information disclosure.
Krispy Kreme was granted worldwide rights to franchise and sublicense the trademarks to franchisees and sublicensees with a license agreement dated May 27, 1996. The grant also includes a non-exclusive, non-assignable right and license to use the trademarks in Krispy Kreme’s corporate name and in connection with the licensed products. Products include all services, fresh and frozen doughnuts, fried pies, honeybuns, bagels, muffins, sweet rolls, all products sold at Krispy Kreme retail locations and other products as agreed. The license agreement remains in force and effect for a period of one year and renews automatically for successive annual terms unless canceled by contract terms.
Throughout the period 1997 to 2015, the Krispy Kreme franchise royalty rate and trademark royalty rate did not change. As of July 2019, the franchise rate remains the same.
The Split
It is simple. The franchise royalty rate is 4.5% of sales. The trademark royalty rate is 2% of sales. In this case, 44% of the franchise royalty rate relates to trademark. This percentage and the broad use parameters offer insights into trademark royalty rates in areas where there are limited market-based transactions to observe.
The Value Discovery mission is to find and share market-based transaction data to help uncover asset value. In this article, we uncover transaction data and a market-based premium and use it to estimate Time Magazine’s print subscriber base value. However, the market-based premium can be applied to estimate or test value conclusions for any similar print subscriber base. The source of this information, that was found during our daily search for useful market benchmark transactions we report at Value Discovery, is an article published by “Digiday.”
Valuation and Value Drivers
There is a wealth of information about discovering the value of a subscriber/customer relationship. One of the best sources offering a detailed discussion and practical examples is the Appraisal Practices Board’s Valuation Advisory #2: “Value of Customer-Related Assets.” The APB is an independent Board of The Appraisal Foundation.
In general, customer relationship value is dependent upon the amount of income earned from the relationship over the economic life of the relationship and the risk of achieving that income. Quantifying these factors form the basis for applying the income approach to value. The application of an income approach is typically preferred when valuing intangible property and many times this approach is used to support a market transaction. This means that the market and income approach can be related.
It is likely that the deeper the customer relationship, the more valuable the customer. For example, the relationship could be contractual or simply dependent on repeat patronage.
Print Subscriber Value
As stated earlier, an observed market-based premium will drive our analysis to discover the print magazine subscriber base value. We will present the data, calculate the value and suggest testing the conclusion.
Table 1
Source Data — Table 1 details basic purchase data. Time Magazine achieved a 19.4% operating profit margin and was sold at 5.8x operating profit and 1.12x revenue. If operating profit is a good proxy for EBITDA, the 5.8x operating profit multiple is below the low end of the 8x to 12x industry EBITDA multiples typically paid for subscription-based businesses. Time Magazine sold within the range of advertising only based businesses that currently indicate multiples of 4.0x to 7.0x EBITDA.
Table 2
Value Development — The observed industry market multiple premium paid for a subscriber-based business versus an advertising-based business will serve as the starting point of our value calculation. Many will recognize this exercise as the “with and without method” approach to value. In other words, each business has the same complement of assets used to generate a return except for one asset and that asset contributes to an increased return. In this exercise, the market multiple premium attributable to the print subscriber base ranging from 42% to 50%, as shown on Table 2, is used to identify the print subscriber base value.
The simple steps to calculate value begin by applying the market multiple premium paid to Time Magazine’s operating income to arrive at the print subscriber base value. The value indication ranges from $79.8 to $95.0 million or a per print subscriber value ranging from $39.88 to $47.85.
Ultimate Check
Ultimately, any subscriber base value estimate needs to be viewed in combination with the other assets assembled in the business that contribute to income. As a simple test, we will reduce the purchase price, assumed to be representative of the purchase consideration, to observe a lump sum residual representing the other tangible and intangible contributory asset value. The residual value can then be compared to typical industry residual value calculations.
Table 3
This calculation, detailed in Table 3, shows that the residual asset value ranges from 49.6% to 58.0%. If Goodwill represents 30%, is there room for the remaining value attributable to the other assets acquired such as the Time Magazine brand, advertising supported subscriber base, advertising relationships and tangible assets?
At IPSCIO/RoyaltySource® we notice that sometimes a license specifies a different royalty rate for patented versus unpatented technology. Sometimes it is an implied differentiation — for example, if the licensed territory is worldwide and global patent protection is not available, the Licensor is willing to accept a lower royalty rate in recognition of the increased risk associated with no patent protection. We observed 64 licenses currently available in the IPSCIO/ RoyaltySource® royalty rates database that detail this royalty-rate spread. This article uses the 64 licenses in an analysis of royalty-rate differences based on whether the technology is patented. Table 1 shows their breakdown by technology type.
Table 1
The majority of the licenses grant rights to early-stage technologies in the area of pharmaceuticals, biotechnology and medical field in general. This is not surprising, since our database is heavy with technology licenses in these areas. In some of these licenses, the patented and unpatented technology were the same, but in all cases the unpatented technology appeared to be related or necessary to practice the patent rights.
Several of the licenses outlined royalty rates on sales of licensed products in patent-covered countries versus those in non-patent countries (the non-patent countries are characterized as locations where patents are pending, invalid, unenforceable, expired or not issued). Other licenses did not specifically discuss territories, or indicated lower royalty rates paid for technology of similar characteristics including know how, trade secrets and generic competition. These can be likened to patent rights in a nation that does not recognize them. Others simply specified a downward adjustment to the patent royalty rate.
Technology Overview
In general, the Pharma/Biotech license segment includes therapeutic and diagnostic technology-related licenses. The Medical-related technology license segment includes devices, equipment and supplies. The Energy/Environment category focuses on alternative, renewable and conventional energy technology.
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The Electrical/Electronic technologies include areas such as batteries, lasers, lighting, switches and power-management components. Chemical technologies cover composite materials, chemicals and plastics. The Computer licenses include computer components and the Construction segment covers construction/building materials and equipment.
License Characteristics
A further look into some of the license characteristics indicates that about half of the licensors are research-related organizations and the other half are corporations. All the licensees are represented by corporations (see Table 2).
Table 2
Many of the licenses granted lengthy terms or terms ending on the date of the last-to-expire patent. These long-lived rights are often granted in pharmaceutical/biotechnology-related licenses, since such rights are required to justify the large investment required to bring products to market.
Table 3 summarizes the number of observations by Territory, Exclusivity and Upfront Fee. The overwhelming majority of the licenses granted exclusive worldwide territory rights and just over half of the reported upfront fees. These ranged from $12,500 to $5,000,000.
Table 3
The years of granting varies from 1992 to 2016. In each of the licenses, the royalty base was a measure of sales. Several of the transactions had a sliding scale or tiered royalty rate. This analysis accommodates multiple rates within a given license by including a total of 84 observations in the calculations.
Market Based Royalty Rate Spread Observations
We observed the spread between the patented and unpatented technology royalty rate detailed within each license and divided that spread by the patent royalty rate to develop the percentage reduction. Table 4 presents the results of these calculations.
Table 4
The measures of central tendency point to a 50% reduction in the royalty rate of a license lacking the existence of a valid patent. In essence, this measure supplies a benchmark to develop royalty rate payments for unpatented technology, such as know how and trade secrets.
We can also characterize the inverse of this royalty rate reduction as a patent premium paid for the patent right to exclude others from the market. In other words, the percentage premium paid can be observed (1 minus the % royalty rate reduction) and then used to develop an indication of a patent royalty rate by dividing an unpatented royalty rate by the percentage premium.
Companies pay millions of dollars for the right to attach their names to professional and amateur sports arenas and stadiums and entertainment venues to connect with consumers. Typically, these naming rights contracts include an annual payment over a period of years. Some payments are fixed, others increase over the contract life. Only in unique instances are rare lump sum payments made or rights granted into perpetuity. The typical contract term is 10–20 years and includes payments ranging from hundreds of thousands to millions of dollars annually. The sum of these payments over the contract life are often referenced in media coverage and are used to rank the most expensive deals.
It is also common to see sponsor turnover. Not only at the end of a contract term, but early exits. We note that early exits have been triggered by sponsor bankruptcy, acquisitions or business lines changing away from consumer-facing products. It is also interesting to note that not all acquisitions result in an early exit. Some of the acquirers simply keep the contract and rebrand using their name.
Other contract provisions can include an option to extend the contract life, terminate early or to other sponsorship rights such as concession stands, vending, restaurants and lounges and even pouring rights to alcoholic and non-alcoholic beverages.
Many ask if these naming rights deals are worth the money spent. The answer is not clear. What is clear, short of any unusual circumstances such as a team leaving or the scheduled demolition of an old venue, are the factors driving demand in the recent deals we have reviewed.
Brand Building
A primary purpose behind paying for these rights is brand building. Naming rights offer some unique brand building opportunities over more commonly employed advertising and marketing campaigns.
Enhanced advertising via media coverage — such as dispensing with the cost of a 30-second TV ad ranging from US$200 for local to US$123,000 broadcast nationally. Of course, if the sports team is successful and post season play ensues the cost saving is higher. One could “strike it rich” and be selected as the Super Bowl venue! Super Bowl ads can exceed US$4.0 million.
A monopoly position is created by securing a captured audience
Expanding fans’ emotional team bond to products and services
Being perceived as a “good corporate citizen”, supporting our town, our team
Being a named facility located close to a well-traveled highway or railroad is a unique “billboard” with continuous exposure
Value Drivers
As expected, the data sample we reviewed points to deals involving professional teams as the most expensive and that value drivers are many, such as:
The type of sport played
Major or minor league team, university or high school venue
Number of teams competing in the venue
The extent of media coverage, a national or local presence
Entertainment venue outlook for events such as music or entertainers
A Look at Recent Deals
The data sample in the period 2018–19 included 12 expired deals. All were renewed for the same venue, indicating that these deals are considered to have value. Two deals were extraordinary in nature. They were excluded from our review. One venue is scheduled to be demolished since the sports teams were relocated. The other deal exhibited an extraordinarily high increase in annual payments versus the expired deal. This leaves 10 deals.
As another measure of value, we investigated the willingness to pay more to secure these rights by calculating the change in annual average contract payments. We calculated the change by relating the contracted payment amount of the new deal to the expired deal. Those results are included in Table 1.
Table 1
On a gross change basis, the median shows a substantial increase. This is interesting, but we also need to know if such change resulted from only inflation growth. To observe real price change, or to remove the effect of general inflation, the annual rate of inflation was subtracted from the annual rate of change measured over the expired contract term.
For the group, the median inflation adjusted price change was 1.4%. The Minor League sports team venues have enjoyed higher growth compared to the Major Leagues. In summary, it appears that the demand to acquire such rights remains and companies are willing to enter new contracts with higher payments. Empirically, it appears the naming rights contracts are worth the investment and existing contracts are more valuable given the advantage of below market contract payments.
Every year we offer composite royalty rate benchmark information in asummary report for 15 different industries. Detailed in the Figure is a graphic presentation of the industry average royalty rates sourced from public documents and included in the summary.
The benchmark measures include average, median, maximum, minimum and the interquartile range for a total of 9,318 agreements included in the 2020 Summary. It is important to understand that in each year, the number of agreements used to prepare the graph is equal to the total number added to the RoyaltySource database up to that year. It is evident that industry average royalty rates do not change much year-to-year, but there are significant differences between industries, indicating that a composite benchmark supplies good insight.
Touching on elements that influence the use of industry composite data is helpful in bringing greater transparency to selecting a royalty rate before or after completing a transaction or finalizing an opinion. Our list is not intended to be all-inclusive, but it is intended to jump-start the due diligence process needed to develop or test a conclusion.
Composite data offers:
A view of the overall market and industry sector trends over time.
Observations averaged together form a general statistic representative of the economic impact of license clauses and royalty payment structures. For example, the scope of a license includes clauses such as:
• License Grant • Exclusivity • Territorial Restrictions • Duration, Renewals, Termination • Ownership Rights to New Developed Technology • Monitoring and Quality Control
These license clauses influence royalty payments, yet their impact may be unknown or difficult to measure. The mix of royalty payment structures also influences the magnitude of a royalty payment. The royalty payment can be split between various payment methods such as:
• Upfront fees, milestone payments, stock issuances • Royalty — lump sum, running royalty, defined amounts, minimums, etc. • Required purchases of supporting services or materials • Sharing of costs, etc.
A composite look considers these influences.
Direction and/or a check against a detailed analysis. For example, how do you know if your conclusion makes sense? If your conclusion appears to be “out-of-bounds” compared to a composite, more due diligence is needed and/or a detailed explanation of why your conclusion is outside the bounds. This check will likely cultivate a better report for audit or court.
Supplying a useful benchmark against which to measure Intellectual Property portfolio performance to help answer questions such as (1) are we underpricing or overpricing our technology and (2) what is the licensing activity in our industry segment?
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Applying Industry Composites in Practice
Just knowing the boundaries of market-based royalty rates and deal terms for your target Intangible Property, prior to a more in-depth search and analysis, gives support for various purposes. These include:
Transactions — Licensing and purchase/sale of IP transactions. Licensing executives can quickly control compensation expectations by establishing a playing field, or a range of royalty rates/values, prior to and during negotiation.
Litigation — Infringement damage litigation has become so expensive that the parties to the matter can quickly assess possible damage awards before moving forward to make sure the choice to litigate or settle is economically feasible.
Financial Reporting — Experts performing purchase price allocations under IFRS 3/ FASB ASC 805 need to select a royalty rate when using the relief-from-royalty approach to Intangible Property valuation. Selection of a comparable royalty rate begins with assembling supporting documentation for the selection of a royalty rate. A broad view of royalty rate benchmarks and a follow-on targeted search to make a judgement will strengthen the analysis and supporting documentation under audit review.
Taxation — Transfer Pricing experts can quickly test intercompany agreements by using benchmark royalty rate data and the interquartile range.
Other Industry Reports
We have also developed a series of “Industry Reports” that supply a more in-depth analysis of the technology transactions comprising the 15 industries. For example, a report on the “Automotive Industry” is available and the benchmark data includes sub-groups of powertrain, efficiency/emission control, electrical/electronic and safety. The series also includes a unique “Food & Beverage Brand” report looking at royalty rates from in- and out-licensing under three different marketing arrangements — core product, co-brand or brand extension. It also looks at character and celebrity licenses.
Asset valuations are influenced by many factors, including market size and growth. The wide range of worldwide cannabis market forecasts is an indication of the industry’s potential. There is little uncertainty surrounding the fact that a legal market is growing, and medical and recreational use will drive growth. Other markets, such as health, food and beverages are also anticipated to benefit.
Recent forecasts of the 2017 worldwide market range from US$9.50 to 17.18 billion and average US$13.34 billion. This represents a 82.3% increase over the 2016 US$7.32 billion average estimate. While this growth is not sustainable, it is not unusual in an emerging market.
Table 1
Longer term growth estimates over a 5- to 10-year term point to a slower, but still robust outlook — from a high of 46.6% for the seven years ending 2024 to a low of 15.1% for the five years ending 2022.
Recreational Cannabis Drives Market Value
Impacting the forecasts are the number of countries and U.S. states that will legalize recreational and medical uses. It is anticipated that recreational cannabis will be a primary growth driver.
The largest market for recreational cannabis is anticipated to be North America, with two-thirds attributable to the United States. Current estimates of the U.S. market total US$23.3 in 2022 and US$52.2 in 2025. Canada legalized recreational use in October 2018.
Legalization Trend in the United States
Uncertainty surrounding the success of expanding the legalization of recreational use likely contributes to the disparity in market value forecasts. A review of the historical medical cannabis legalization trend in the United States may help gain insight into these forecasts. The trend considers the 22-year period of approvals from 1997 to 2018 as a guide to future recreational legalization. The trend gives insight to qualitative factors such as behavioral and societal considerations that weigh the benefits and risks of legalization and the momentum behind the acceptance of these factors.
State Legalization Data — At the end of the 22-year period, 33 states, including Washington DC, have legalized medical use. The adoption growth over the period was calculated at 17%. This calculation only considers total legalization and no other limited medical use legalization, such as a low-THC and high-CBD. Including the limited use approvals increases the State count to 48 and growth rate to 19%. At the end of 2018, 11 states (plus Washington DC) have legalized recreational use. The states of Colorado and Washington were the first to approve recreational use in 2012.
Initial Period Data — A comparison of growth rates for the initial six-year periods of medical (1997–2002) and recreational (2013–2018) cannabis legalization shows that both approvals grew at a similar rate of 33% despite the 16-year delay between the initial approval of both uses. Note the number of states with recreational approval totaled 11, or three more than medical during these periods.
It appears that behavioral factors negatively impacting the approval of recreational use are less of a roadblock. Acceptance may be positively impacted by the successes attributable to medical use.
Subsequent Period Data –To gain insight into the future number of states legalizing recreational use, the historical state medical cannabis adoption rate of 9.3% for the 2003–2018 period was calculated and applied to the 2018 state count of 11. Using these inputs, an estimated 24 states will legalize recreational use by 2027. By 2035, all 50 states are estimated to legalize recreational cannabis.
Summary Forecasts vs Estimates
We will approximate, or estimate, the worldwide market size by using various inputs that may be incomplete or uncertain for comparison with these nascent market value forecasts. These estimates are based upon our estimate of the U.S. market value and adjust that value upward using North America and Worldwide market segment expansion factors. The estimates are summarized in Table 2.
The U.S. market estimate considers an average State cannabis market size of US$1.875 billion and the number of states anticipated to legalize both recreational and medical cannabis use. The state average considers the 2017 California and Washington cannabis market sizes of US$2.75 billion and US$1.0 billion, respectively.
Using market segment forecasts for 2022, the U.S. and Canadian legal cannabis market could represent 90% of the world market. The U.S. is expected to garner 73%, Canada at 17% and the rest of the world will represent 10% of the legal cannabis market. Using these projections, the U.S. market is projected to represent 80% of the North American market.
Table 2
These estimates help narrow the range of worldwide cannabis market forecasts to develop and evaluate prospective financial information for valuation purposes.
The cannabis industry is out of the shadows and emerging into one of the fast-growing global industries. Once illegal, it is now impacting other industries such as food, beverage, recreation and medicine. Medical marijuana is already legal in more than half the United States, and eleven states (plus Washington DC) have legalized marijuana for recreational use. Just recently, Canada and South Africa joined Uruguay in legalizing recreational marijuana use.
Licenses
Research and development in the areas of medicine and production are industry growth drivers. We identified a sample of 16 cannabis related technology licenses.
Ten licenses relate to medical treatment. Six licenses focus in area of production, such as cultivation, testing, extraction, processing and equipment.
For the entire sample, the range of royalty rates was from 1% to 50% of sales with a median rate of 8.8% of sales. The license agreement dates ranged from 2012 to 2018.
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