11 Key Patent Valuation Parameters Used by Experts
Patents are an important form of intangible asset for any modern organization. They provide additional streams of revenue either in the form of innovative products or royalties from licenses. In some cases, companies that are intensively focused on research and development (R&D) may even develop valuable patented designs, processes, and technologies only to sell them off at a high price. However, while selling or licensing patented technology, design or process, it is essential to conduct a prior valuation of the patents. While companies may deploy several methods of patent valuation, this article mentions 11 important parameters used by experts.
First, let’s discuss the importance of patent valuation.
Patent Valuation and its Importance
Patent valuation is an IP process that enables businesses to determine the monetary worth of their patents or the entire patent portfolio. Accurately valuing patents bolsters your chances of monetization and positively impacts R&D efforts of your organization. The process is important for every type of company, be it a large scale or a medium/small scale enterprise. Since patents are valuable assets, it makes sense for organizations to estimate their worth and identify opportunities to monetize them accordingly. As patent filings continue to increase, there is a good chance that the patent market will remain competitive and patent portfolio valuation would be central to several business transactions.
Two Broad Categories of Parameters Used by Experts for Patent Valuation
For a company to judge the value of its patents, it needs to comparatively analyze the market value of its patented innovation. However, this is not the only parameter for finding the value of patents. There are two broad categories of patent valuation parameters:
Patent valuation experts use quantitative and qualitative factors to assess the value of intellectual property assets. While there is no ‘one-size-fits-all’ approach when using these categories, experts use a combination of both to arrive at a comprehensive valuation of patented innovation.
Quantitative Parameters for Patent Valuation
Each of the broad categories mentioned above is divided into several sub-parameters that should be considered while conducting patent valuation. The figure below covers the factors that fall under the quantitative aspect.
- Market Size
Factors like market size play a critical role while valuing patents based on quantitative parameters. This aspect relates to the market size of the patented technology. For example, ‘edge caching’ is an important technology in the content delivery market. According to recent data, the global content delivery network market size is likely to increase from $14.4 billion in 2020 to $27.9 billion in 2025. Therefore, the value of a patent pertaining to this technology can be significantly impacted by its market size and growth.
2. Geographical Location
Though market size is a crucial factor in patent valuation, the geographical coverage of the respective patent family should also be considered during valuation. The value of a patent may change depending upon its geographic coverage, i.e., whether it falls under the United States Patent and Trademark Office (USPTO), the European Patent Office, or any other jurisdiction. Thereafter, market size can be considered in terms of these geographies.
3. Technology Adoption
Another important parameter for value measurement is to consider the current stage of the given technology. For a technology that is still in its nascent stages, experts may often arrive at a lower patent valuation in comparison to the ones that have matured. However, it varies from market to market, and thus the valuation shall be carefully adjusted.
4. Market Applicability
For patented innovations that have proven to be useful in existing products in the market, the value often increases. This means that patents that are successful and currently applicable in the respective market have a higher patent valuation.
5. Historical Data
In this market-based approach, experts consider the past transactions that have taken place for the given patented technology. For example, in the case of a software-related patent, an expert will usually identify per patent value of transactions that have taken place for it in the past. If an organization has USPTO-granted patents in its portfolio, then this parameter is considered extremely important because most companies in the US consider past transactions to be a good measure for the valuation of a patent.
6. Future Cash-Flows
The income-based approach that forecasts future cash flows that a patent can bring, is also a useful parameter for patent valuation. Referring back to the ‘edge caching’ example, it can be said that as the data consumption (such as movies, songs, web series, etc.) is growing due to increasing penetration of the internet, the value of such patents is likely to be high in the future. This estimation is only possible if we consider future cash-flow prospects of the patent.
Qualitative Parameters for Patent Valuation
Apart from these quantitative parameters, there are 5 important qualitative parameters as well which provide a fresh perspective on patent valuation. Experts often rely on these parameters when the quantitative methods prove inconclusive in arriving at a valuation for a patent. The following parameters are listed below.
Some patents have better coverage than others when it comes to protection against duplication. The patents that have widespread infringement command a premium and therefore are considered to have a higher value as well.
This parameter is one of the most important one because it takes into account the buyer’s perspective. For example, suppose a corporate is looking to buy a patent portfolio, and it finds out that some of the assets in the portfolio are already licensed to competitors. This implies the buyer can’t use these assets against their competitors. So, the value of that portfolio automatically reduces for that particular buyer. Therefore, encumbrances might reduce the value of the patent portfolio.
3. Patent Validity Strength
Once again, from a buyer’s perspective, a patent with questionable validity generally has lower monetary value. A buyer always seeks patents that can withstand litigation and have a high validity strength. The valuation of a patent can be enhanced by conducting an invalidity search to assess the strength of a patent in terms of validity.
4. Age of the Patent
Since it is generally considered that any given technology takes about 10 years to fully mature, a patent that has a remaining lifespan of 10 to 12 years is more valuable. In general, most patents have a lifespan of 20 years, hence, such an aged patent often has a higher patent premium due to its proven efficacy.
5. Patent Claim Scope
The claim scope of any patent should be just right – neither too broad nor too narrow. A very broad claim scope might pose validity issues and a too narrow claim scope might create applicability challenges. Hence, one can examine the claim scope of the patents to adjust their value accordingly.
The Best Method of Patent Valuation
When it comes to patent valuation, businesses can adopt several strategies to make the process effective. This is because there is no particular industry-standard method that is unanimously used by all experts. However, a professional strategic partner can optimize the entire process based on its years of expertise in handling such cases.
Sagacious IP modifies the existing patent valuation methods based on the needs of businesses and their respective industries. Our team of experts accurately values patent portfolios for transaction activities such as licensing, sale and purchase. Click here to know more about our services.
-Aman Goyal (ICT Licensing) and the Editorial Team