What Is Valuation of Patents?

Valuation of patents is an important step as an appraisal may be needed. As an intellectual property (IP), the appraised value is used for transactions that include but are not limited to: litigation, tax, accounting, estate settlements, bankruptcy, divorce, mergers, or a sale of a business. For businesses with multiple inventions, the company portfolio may need to be valued. 

Steps

  1. Before starting the evaluation, check two things: a) that the patent is active and not expired and b) that the required maintenance fees associated with the patent are current. Failure of a patent holder to pay the required maintenance fees can result in the patent being considered abandoned with no monetary value.
  2. Request copies of the patent's application form and all correspondence with the patent office, foreign patent applications relevant to the invention, business plan, financial statements, appraisal information, and marketing plan. You'll also want economic data, copies of licensing agreements or licensing agreement offer(s), contract(s), advertising and promotional materials used to promote the invention, and cost information relevant to the invention. 
  3. Assemble a team of experts capable of understanding all aspects of the patent process. 
  4. Read the patent information carefully to ensure all information is complete. 
  5. Have a thorough understanding of the scope of the invention, which is the basis for valuing a patent. 
  6. Consult with an attorney who specializes in patents.

Pros of Valuing a Patent

  • For companies that deal with multiple transactions, such as auditors, an appraisal can play an important role in financial reporting. Should a legal issue arise, it's beneficial to understand the valuation process in case there's a need for an expert witness. 
  • Valuing a patent is a complex process that is time-consuming, expensive, and highly detailed. It is recommended to use the services of a patent lawyer who is trained in the field and brings the experience and technical knowledge necessary to working with patents. 
  • One of the key factors for valuing a patent is to know what the potential value of the invention is. Having the valuation information helps decide whether it's cost-effective to invest in the invention. Investing in something that has a low valuation would most likely result in less than a profitable return on profits. 

Cons of Valuing a Patent

FAQs

  • What method is used to value a patent?

The economic-analysis method is the most common method. It consists of three approaches: income, cost, and market.

  • What is the cost approach?

With the cost approach, it is the replacement cost of the patent that is determined. The amount paid is to cover the rights of the invention should it need to be replaced. 

  • How does the cost approach influence a prospective client interested in buying a patent?

It would not make good business sense for a potential client to pay more for a patent if the cost is equal to the protection rights. 

  • What is the income approach?

With the income approach, the valuation is based on future cash flow. This method states that the present value comprised of cost savings and incremental cash flow is the basis of the patent's value. In other words, the current value based on future cash flow is the patent's value.

  • What is the market approach?

The market approach method is based on what a buyer is willing to pay for similar inventions or those patents that have were sold and repurchased.

  • If a buyer chooses the market approach, what should he or she look for to base the valuation?

There are two things necessary when using the market approach to determine the value of a patent: a) There must be proof of an active market or one that is similar to the invention and b) research that shows past transactions of the same or nearly same invention. When looking at comparable patents to buy, consider the potential growth of the invention, the share of the market dedicated to the invention or the potential market share it may have, and the characteristics associated with the industry.

If you need help with the valuation of a patent, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.