Valuing a Patent

There is almost no limit to the value of patents. Businesses rely on innovation to keep pace with their competitors, and one of the best ways to gain an advantage is protecting innovations by using patents. With a patent, a business can secure their inventions from their competitors for a set length of time. Because a patent counts as an asset, a company's investors need to know the exact value of a patent.

Every business needs to include the value of their patents when bookkeeping. Accounting for the value of patents of particular importance during acquisitions, mergers, the dissolution of a business, and during the course of bankruptcy or infringement litigation. The best way to learn the value of a patent is to determine the value of the invention that the patent covers. Obtaining a patent for an invention without value simply isn't practical. Due to their intangibility, finding the value of patents can be difficult. The economic-analysis method is the most common solution for valuing a patent.

In addition to protecting inventions, patents can be used to develop a company's brand and are also a useful tool for creating new markets. With the right patents, a company can raise financing for development, as well as creating streams of revenue by licensing their patents. If used correctly, a patent can help a business succeed in the short and long term.

What is a Patent?

When an inventor is granted a patent, they own the exclusive right to their invention for a set period. The protection provided by a patent prevents other people or businesses from using an invention unless granted the right by the patent holder. Being granted a patent requires following very strict regulations.

For an invention to be patentable, it cannot fall into these three categories:

  • Abstract ideas.
  • Laws of nature.
  • Natural phenomena.

An invention must also fit into one of the following categories:

  • Human manufactured products.
  • Machines.
  • Processing methods.

Another rule for patenting inventions is that the invention must have been previously unknown. This means that the invention you are attempting to patent cannot have been previously disclosed to the public or has been included in a USPTO patent application. You also cannot patent an invention that was created by making obvious modifications to an existing invention.

When you apply for your patent, you must fully describe your invention in a manner that would allow another person to create your invention using only basic skills. There are several types of intellectual property rights, including patents. These rights are granted to brand-new inventions and give the inventor sole rights to their product for a twenty-year period. Intellectual property rights are one of the most powerful commercial tools in the world, particularly for businesses seeking to transition their products from research & development to the marketplace.

Appraising the value of patents can be important for accounting purposes, taxes, lawsuits, and transactions. You may also need to account for the value of patents during bankruptcy proceedings or during a divorce. Patents may also need to be appraised for the purpose of GAAP financial reporting. This is very common for high-tech industries undergoing an audit or valuation.

Types of Patent

If you invent or discover a new species of plant, you may be able to protect your invention using a plant patent. When a plant patent is granted, it will last for twenty years and will prevent others from using or selling your plant.

Utility patents cover a variety of inventions, including software, a new type of process, or an improvement of an existing invention. Upon filing, utility patents will be good for twenty years.

You can use a design patent to protect the appearance of an invention. These types of patent are especially useful when you've altered the style of an invention but not its functionality. Unlike other types of patents, design patents only last for fourteen years.

Economic Analysis Approach

When using the Cost Approach, the value of your patent will be equal to the cost of replacing your patent. Whatever amount of money you would need to spend to replace your invention is the current value of your patent. The Income Approach determines the value of your patent by gauging how much revenue you could earn from your patent in the future.

If you need help with determining the value of patents, you can post your legal needs 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, Stripe, and Twilio.