Key Takeaways

  • Patent valuation is essential for licensing, mergers, litigation, fundraising, and financial reporting.
  • The three core patent valuation methods—cost, income, and market—each offer advantages and limitations depending on the purpose of valuation.
  • Quantitative and qualitative approaches can be used in combination to assess patent value more holistically.
  • Patent valuation requires analysis of legal, economic, and technical factors—including enforceability, scope, and commercialization potential.
  • Companies often prefer the income method for patent valuation due to its future revenue forecasting capability.

Valuing Patents

Valuing patents is important before you submit your patent application. Patents are intellectual property (IP) rights that are also intangible assets. It can be challenging to attempt to value a patent, but it is important to think of the valuation of your patents when expanding your business. Research indicates that approximately 70-80 percent of a business’s market capitalization comes in the form of patents, trademarks, copyrights, and other intangible assets.

While you want to be innovative in your approach to new inventions, you’ll want to value those inventions to ensure that you are making the right decision in patenting such inventions. You’ll also want to consider how much of a profit you can make in the event you choose to sell or license your invention.

  • Kodak sold its portfolio of 1,100 patents to several licensees for a total of $525 million.
  • Google purchased Motorola Mobility for $12.5 billion.
  • Microsoft took over 800 patents from AOL for more than $1 billion. In turn, Microsoft sold only 70 percent of those patents to Facebook for $550 million.

All About Patents

A patent is an exclusive right that is given to an inventor for a certain period of time, usually 20 years. It prevents others from making, using, or selling the product while the invention is protected. If another person or company infringes on the patent holder’s protection, the holder can sue for patent infringement. Not all inventions can be patented, as there is certain criterion that must be met in order for the invention to be patented. The invention itself must be new and non-obvious.

Patents can be used for any number of reasons. It can be used to simply help prevent others from infringing on that holder’s benefit. It can also be used to subsequently sell or license to another business or person, thereby increasing the patent holder’s profits.

There are three types of patents, including utility, design, and plant patents. While utility and plant patents last for a 20-year time period, design patens last for 14 years.

  • Utility patents - A utility patent is granted to an invention that provides a new and useful process, a piece of machinery or software-related invention.
  • Design patents - A design patent is given to a function or design of an invention.
  • Plant patents - A plant patent is granted for a new variety of plant.

Why Is It Important to Value Patents?

  • Patents might need to be appraised for accounting, transactional, or legal purposes. This can include bankruptcy, divorce, estate, or mergers/acquisitions issues. For example, assuming that an individual holds a patent alongside his companion. If the couple divorces, they may be forced to split the profits earned from that patent. More common, however, are patents that are licensed or sold by large companies. If a large corporation wants to sell or license a particular set of patents, they will need to be able to properly value those patents.
  • Intangible assets, like patents, can significantly increase a company’s assets, and can also help provide an accurate fair market value of a company.
  • Properly valuing patents, as well as trademarks, can give a business a competitive edge over other similar businesses.

How to Value a Patent

There are different methods for valuing a patent, including cost, income, and market methods.

Cost method. This approach indicates that the patent’s value is the replacement cost, which is the amount that it would cost to replace the item. Simply put, it would be the amount it would cost to replace the invention.

Income method. The patent’s value will be the present value of the cash flow or cost savings that it will help provide. For example, let’s say a company patents a product. The reason for patenting the product is because the company is expecting to increase its capital based on the sale of that product, or may expect to save money based on the invention. Therefore, that expected amount will be the value of the patent when using the income method. This method can be further divided into ‘profit contribution’ and ‘royalty.’ The profit contribution is the profit credited to a patent. The royalty is the income stream expected if a licensing agreement is entered into.

Market method. Using this method, you’ll need to determine what a potential buyer would pay for a similar product or service. Therefore, you can value your patent by looking at similar patents.

Common Pitfalls in Patent Valuation

While learning how to value patents, it’s important to avoid several common missteps:

  • Overestimating market potential: Assumptions about revenue can be overly optimistic, especially without proven commercialization.
  • Ignoring enforcement risk: A patent with vague claims or prior art conflicts may be difficult to defend.
  • Relying on a single method: Using only one approach, especially without cross-validation, may lead to misleading results.
  • Neglecting qualitative factors: Financial models often miss strategic value, such as deterring competition or enhancing brand image.

Consulting an experienced patent attorney or valuation expert is recommended when significant business decisions depend on patent worth.

Step-by-Step Patent Pricing Framework

According to the Journal of Accountancy, a thorough valuation process should involve a structured, multi-step framework. Here is a condensed version of their 20-step approach:

  1. Confirm patent ownership and status
  2. Evaluate enforceability and remaining lifespan
  3. Analyze technology lifecycle and obsolescence risk
  4. Assess the patent’s competitive positioning
  5. Determine the stage of product development
  6. Analyze historical development costs and time invested
  7. Identify current and potential markets
  8. Review licensing history or potential
  9. Estimate future income or savings
  10. Determine applicable discount rates
  11. Identify comparable patent sales or licenses
  12. Adjust for legal risks or restrictions
  13. Incorporate industry trends and economic outlook
  14. Calculate valuation using chosen method(s)
  15. Cross-check results using secondary methods
  16. Document all assumptions and sources
  17. Prepare a formal valuation report
  18. Review with internal stakeholders or advisors
  19. Update valuation as conditions change
  20. Consult with legal and IP professionals

This structured process helps reduce bias and improves transparency in valuation outcomes.

Quantitative vs. Qualitative Valuation

Valuing patents can be approached through quantitative or qualitative frameworks:

  • Quantitative valuation focuses on measurable financial data—like costs incurred, market pricing, or projected revenues. It aligns with the cost, market, and income methods.
  • Qualitative valuation assesses intangible elements such as:
    • Legal strength of the patent (validity, scope, enforceability)
    • Technical importance (how central the technology is to a broader system)
    • Commercial potential (licensing opportunities, market demand)
    • Competitive advantage the patent provides

A blended approach that considers both numerical and strategic factors is often ideal, especially when financial data is incomplete or market comps are unavailable.

Considerations When Choosing a Valuation Method

When deciding how to value patents, it is important to consider the context and objective of the valuation. Each method—cost, income, and market—has specific strengths and weaknesses that affect its suitability in a given scenario:

  • Cost Method is most appropriate for internal accounting or when limited revenue history exists. It reflects the expense of developing or replacing the invention, but it does not consider future income or commercial potential.
  • Market Method is useful when there are comparable patent transactions. However, its effectiveness is often limited by a lack of accessible and relevant market data.
  • Income Method is preferred for investment decisions, licensing, or strategic planning because it projects the future economic benefits derived from the patent. That said, it involves forecasting and discounting future cash flows, which can introduce uncertainty.

These methods may be used individually or in combination, depending on whether the valuation is for tax compliance, litigation, strategic planning, or sale.

Frequently Asked Questions

  1. Why do businesses need to value patents?
    Patent valuation is essential for licensing, mergers, litigation, fundraising, tax compliance, and strategic planning. It helps quantify a patent’s economic impact.
  2. What is the most commonly used method to value patents?
    The income method is widely favored because it projects the patent’s future economic benefit, particularly in licensing or investment scenarios.
  3. How does patent valuation differ from company valuation?
    While company valuation looks at the business as a whole, patent valuation isolates the worth of specific intellectual property assets.
  4. Can a patent have value even if it’s not currently used?
    Yes. A dormant patent may hold licensing potential, defensive value, or strategic worth to a competitor.
  5. Who should perform a patent valuation?
    Patent valuations are often conducted by IP attorneys, certified valuation analysts, or financial experts with experience in intellectual property.

If you need help with valuing your 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.