A Primer on Patent Valuation

  • Aug 1 2017
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  • Category: Blog

In the contemporary marketplace, innovation is essential for a business to maintain a competitive advantage in the marketplace. For this reason, companies are well advised to secure patent rights for their ideas and inventions. Because patents are also valuable assets, ascertaining a patent’s monetary value is vital for attracting investors, engaging in successful business transactions, such as mergers and acquisitions, or conducting an infringement analysis.

How to Value a Patent

While obtaining a patent is crucial for protecting innovations from infringement, an invention must also provide a return on investment, which makes determining the value of a patent crucial. However, calculating the value of patents is difficult because they are “intangible assets,” that is, assets that are not physical in nature. In the context of intellectual property, intangible assets include not only patents, but trademarks, copyrights and business methods as well.

Nonetheless, it is possible to ascertain the monetary value of patents, particularly by relying on the economic-analysis method, which includes the following three approaches:

  • Cost Approach – In this approach, a patent’s value is determined by its present replacement cost. This is the cost of creating a duplicate of the invention in question, or the cost associated with manufacturing or acquiring an equivalent asset. However, this approach cannot be used to determine the future value of a patent asset.
  • Income Approach – Here, the value of the invention looks to the future success of the patent that will be manifested in the form of cash flows, whether arising from increased sales or cost savings. In sum, the patent’s value is based on the present value of these future benefits.
  • Market Approach – The determination of a patent’s value is based on similar patents or products that have been exchanged in the market place; provided, however, that the following conditions apply: there is an active or similar market for the patent, there is a history of prior transactions involving comparable assets, and prices are publicly available.

The Takeaway

In short, determining the value of patent assets is crucial for businesses and investors alike. Patents play a critical role in determining a company’s ability to achieve success in the marketplace, attract investors, or obtain financing. Whether you are seeking to introduce new products, make an acquisition as part of a portfolio strategy, or enforce your patent rights, arriving at an accurate patent valuation requires the advice and counsel of experienced intellectual property attorneys