How to calculate the value of an asset that yields royalties, given its past performance?

Personal Finance & Money Asked on December 28, 2020

Let’s say I have an asset that I created, such as a music copyright. Each year it yields some royalties. Maybe year 1 it’s $1000, year 2, $1200, year 3, $600. If I wanted to sell it, how much should I sell it for?

If it was yielding a consistent $1000 every year, then assuming a 5% discount rate, I guess it would be worth $20,000. But what if I have 10 years of data showing the rate to be trending downwards (or upwards)?
How would I calculate that? Is there a general formula for this? Is the NPV what I’m looking for? Thanks!

2 Answers

In general for assets with uneven cashflows valuation (or fair value pricing) is performed by calculating the NPV of the expected cashflows. You need to estimate the expected cashflows for the lifetime of the asset. In the case of music copyright in the UK this is 70 years after the death of the author (note this is just an example and doesn't cover all of the possible legal differences) so you may also need to estimate your life expectancy if you expect that the cashflows will be long lasting.

There are many statistical techniques (ARIMA, regression, guessing etc.) to estimate and predict future cashflows with one of the most historically accurate being simply to use the cashflow from the last period.

The problem is that the buyer will also be going through this process and will have (at least) a slightly different NPV to yours giving (at least) two different fair prices - one that you have estimated and one that they have. Neither of these prices will be the final price but they will form the basis of price negotiation.

Books have been written on how to do this sort of forecasting so it is beyond this answer to give a full treatment of this. For the simplest negotiations it may be enough to get a feel for what the NPV might be like and then make a bid or offer for the copyright. If the valuation is likely to be high enough to matter then I'd recommend specialist statisticians and negotiators.

Correct answer by MD-Tech on December 28, 2020

Just two points,

  1. Taking your actual example of the music industry, selling copyrights. If you are talking large amounts of money (so, name rights that amount to 100s of thousands or more a year, or perhaps down to 10s of thousands a year), folks involved would use techniques you are asking about (as precisely outlined in MDTech answer) to make an accounting guess at a fair value estimate, and then negotiations would go from there. However. This model (a) completely breaks down and (b) is simply not used at all by any of the parties involved when: you are talking about small amounts of money.

  2. And this varies drastically by industry/field. A good example is "apps" on the goog/apple app stores. They are worth: basically nothing. With a handful of exceptions even apps that made substantial money for awhile, can't be sold as an asset. At the other extreme, rental real estate is sold with a lot of precision using the sort of formulas under discussion.

Answered by Fattie on December 28, 2020

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