Plugging the revenue leakage on Software and IP could boost your overall income by 10%
30 October 2019
Businesses are constantly looking for ways to boost their cash flow, but rights associated with intangible assets are often neglected. Simply put, Intellectual Property (IP) revenue leakage is often an element of the deal that gets overlooked until too late in the process:
- when we looked at acquisitions that had lost significant value relative to the purchase price (as part of our Creating Value Beyond the Deal report), 63% of companies affected said that they didn’t have a technology and IP revenue enhancement plan in place at signing
- the survey also showed that there is huge room for improvement around technology and IP due diligence, with over two thirds of respondents citing this and ranking it the #1 area for “significant room for improvement”.
When’s the right time to tackle this revenue leakage?
Plugging the revenue leakage from the licensing of software and hardware intellectual property to third-parties could boost overall income by up to 10%, an uplift that could be multiplied many times over in a deal.
How can your business make the most of this massive, but still largely untapped, earnings multiplier? Whilst licensing royalties and fees have long been a mainstay of earnings, calculating the payments from these IP rights has been made more complicated by shifts in technology usage such as subscription, software-as-a-service and cloud-based models. Further licence-holders’ ability to keep pace is impeded by the use of predominantly manual processes against lengthy and not always clear contract terms. Finally further sources of leakage range from exchange rate fluctuations to secondary use by the licensees own customers.
So, how much revenue are businesses losing? While it clearly depends on the industry and individual circumstances, our recent royalty work typically reveal leakage as a percentage of overall income in software businesses of 5-10% and semi-conductors of 6%.
Secondary Bonus - Earning Uplift
These revenue shortfalls are clearly significant. But in a deal, the losses on the one side and the earnings uplift from plugging the leaks on the other could be multiplied by up to 10x and even more in high priced sectors such as software. And the uplift would be even bigger if you could find ways to prevent leaks in the future. The possibilities range from clearer contracts to helping clients to develop the processes needed to calculate their payments more accurately. Furthermore, this would also provide opportunities to further optimise revenue through cross-sell, upsell and pricing opportunities
In a recent project, not only did we identify €7 million in mistakes and underpayments over the past three years, but also how corrective measures could scoop a further €4 million in future annual payments. At a multiple of 10x plus, that could translate into a sale price boost of more than €65 million.
Similarly, a mid-sized company was found to be losing out on up to 9% of its recurring license revenues. This leakage has been plugged with the implementation of a revenue enhancement programme.
Don’t sell yourself short
So, while failing to identify and pursue royalty mistakes and underpayments risks selling your business short, tackling past errors and preventing future leakage could provide a significant EBITDA boost. And with an innovative, forward-looking approach to royalty and IP management, the gains would be even greater. If you don’t tackle these leaks early in the sales process, the buyer will reap a double dividend of a lower purchase price and higher earnings to come.
If you have any questions or want to learn more about how we can help you tackle and realise the revenue leakage based on our extensive experience, then please do get in touch.