Valuing Patents: Everything You Need to Know
Valuing patents is important before you submit your patent application.3 min read
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.
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.