Patent valuation is very important for companies or individuals who are looking to buy, sell or plan to license patents. However, it is not an easy process because as we know patents are intangible property, and it has the potential to change is value over time. Unlike trademarks, where the brand value depends upon the popularity of the brand, the patent valuation is trickier.
Some of the patented products or processes are valuable when they solve a specific problem present in the market. But this value can be dropped when a new product or better technology comes into the market which is more valuable or solves the problem in more precise ways. So whenever you want to make deals related to buying or selling the patent rights, you need to evaluate the patent carefully knowing the future possibilities.
What is Patent Valuation?
Patent valuation is a process that determines the value or monetary worth of a patent. As we know patents value depends on how a patent is solving a present problem in the market or how a product can help the startups of companies to generate the money with the help of a patent. But unlike physical assets like tangible properties, patents are intellectual properties which are intangible and change their value from time to time which makes it difficult to calculate the value of a patent.
Patent valuation helps the parties to understand the true worth of a patent as per the market where it is going to be launched. It is a complex process and requires analysis of technical, legal sides, and financial factors related to the patent. Sometimes, you may need to hire experienced patent valuation professionals to make the best value assessments.
Methods of Patent Valuation
There is no single or best method to evaluate the patent as the patent value depends on various factors like market conditions, negotiating positions, and valuation goals. So let us discuss the top methods of patent valuation which can help you to know the exact value of the patent which you going to sell or buy or license to other companies.
Cost Approach
The cost approach is one of the best and most common ways to value the patent or whole portfolio. The basic idea behind this approach is that the investor who is going to buy the patent is not going to pay more for a patent than what it costs to create something similar to it from scratch.
In the cost-based approach, you calculate the expended spent on labour, testing, the material used, approvals, filing of the patent, other fees which are mandatory to maintain a patent, and any other money which was spent to develop or modify the patent. The idea behind this is that the buyer of the patent saves all these costs by purchasing the existing patent from the owner by taka ing license instead of starting over to create a patent from scratch which can cost more than the cost of an existing patent.
The buyer saves tons of time by purchasing an existing patent. Also, the existing patent helps to save money and decrease the risk of launching a new product in the market because there might be a chance that the existing patent is already working in the market.
That’s super valuable because the buyer skips tons of time, money and risk trying to recreate the invention themselves. They know it works and there’s a market for it already.
Market Approach
The market approach method is based on the market value of the patent as compared to a similar product dealing in the same technical domain. However, this method can be useful only when similar products already exist in the market and the exact value of such products is available.
Here is the method how you can use the market approach method for patent valuation:
Identify comparable patents or licenses
Start your research by finding similar products which are commercialising in the same domain. You need to check the type of the invention, industry legal remaining term of patent geographical coverage etc.
Find out the difference between both patents
It is difficult to find similar products in the market which are patented so you need to find out the difference between both products
Apply pricing metrics
Calculate the royalty or other expenses of both patents and compare them with each other.
Determine patent value estimate
By taking all the above factors into account, now you can calculate the exact market value of the product of the process.
By following these steps, you can calculate the value of your patent which you want to purchase or sell to others.
Income Approach
The income approach is also a common method for the valuation of Intellectual property assets. This method estimates the future value of a patent based on the present value of such a product or process being sold in the market. With the help of this method, the person can calculate the future possibility of the patent being a successful product to sell in the market just by checking the cash flows from the asset at present.
Several methods can applied to patent valuation such as:
Relief from the Royalty Method
This method estimates the value of a patent by calculating the present value of royalty which is generated by the owner of the patent. By calculating the royalty the person can calculate that if he should pay the royalty to the owner or he can just take the license from the owner by paying the lump-sum amount.
Incremental Cash Flow Method
This method is based on the incremental cash flow generated by the patented product or process in the market as compared to an alternative without the patented product or process. The incremental cash flow is forecasted and discounted to present value.
There are some main points which should be kept in mind while using the income approach for patents:
- The remaining legal term of the patent
- Anticipated future revenue and market adoption of the patented product or technology
- Costs associated with maintaining or defending the patent
- Degree of commercial success and market advantages provided by the patent
- Risks related to the patent being designed around
- Tax implications
Why is a patent valuation needed?
Patent valuation is good for both the owner and buyer of the patent because it helps to know the real value of the patent. There are several reasons which show that why is a patent valuation important.
Licensing and Commercialization
If any patent holder wants to license or commercialize his patented product or technology, a valuation of a patent is necessary to determine the appropriate fee or sale price of the license. It also helps the person to negotiate the price for a patent license or royalty.
Litigation and Damages
In patent infringement lawsuits, the patent valuation helps the owner to decide the potential damages that occurred to the patented product or technology. The owner can claim the damages by calculating the patent value.
Tax and Accounting Purposes
When a company buy or sell a patent, it affects the company’s balance sheet and tax liability. So, it becomes important for a company to know the value of the patent so that they can maintain their balance sheets and pay the tax accordingly.
Investment and Financing
People who want to invest in your brand name may also need to know the value of your patent. So you can follow these methods for patent valuation.
Strategic Planning
Companies can use the patent valuation as a part of their strategic planning. By understanding the value of inventions, the company can prioritize what technology should launch in the market and help to make the brand name by selling such products or technologies.
These are the basic reasons which show that why valuing a patent is important for a company or an individual to make his product commercially available in the market.
Conclusion
Patent valuation is a tough task when it comes to calculating the lump-sum amount which you need to pay to the other party while taking the license to make or sell the product or technology in the market. There are high chances that the conditions for each patent vary from time to time so you should take care of every aspect of a patent which can increase or decrease the value of a patent.
The remaining term of the patent is one of the essential points which should be taken into account while calculating the value of a patent because we know that the term of the patent is 20 years from the date of filing and once this time is over, the invention will come into the public domain and you do not need to pay the royalties or license money to another party from the expiry of this time. I hope, that now you know how you can use these methods of patent valuation. If you still have any doubts or suggestions, then you are welcome in the comments.