Valuation methodology for businesses with IP royalty revenue

February 08, 2025

by a searcher in Orange County, CA, USA

Hi. I'm speaking to the seller of an off-market business (i.e., no broker) with a revenue stream coming from IP royalties. A majority of the revenue is from contract based administrative fees (i.e., fixed percentage of royalties) while the rest comes from perpetual finder fees. There are very little operating expenses outside of labor.

Should a yield method valuation be used for a business of this nature or should a standard earnings multiple valuation be used since more than 50% of revenue is administrative fee based?

If you're feeling really generous with your knowledge, any idea of the standard multiple for a business like this? Have direction of which professional I should seek out for guidance?

Thank you.

Reply by a lender
in Falmouth, MA, USA

Michael - is there annual growth? How stable is the royalty income, and how relevant will the IP be 10 years from now? If the revenue stream is growing and stable, the Gordon Growth Model could be a strong choice. If you want a more conservative approach, the Yield-Based Valuation might be a better fit.

Finally, you can determine its value using the industry’s EBITDA multiple. A business appraisal company will likely derive a valuation based on a combination of these approaches.

Reply by a searcher
in Orange County, CA, USA

Growth mostly comes from new clients. To be conservative, I would assume stable revenue with very modest growth.

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