Patent valuation is the method by which the real market value of the patent can be calculated so that businesses can generate revenue from their intellectual property. Since patents are corporate assets, it is essential for investors to be able to calculate and account for the value of a patent, in case of a merger or sale
Although regulatory organizations have established patent laws, no law describes specific patent valuation requirements.
Because patents are intangible assets, assigning them a financial value is often hard. That’s why we have developed a ‘hybrid’ approach for patent valuation that enables customers to prioritize their IP assets more efficiently and monetize their portfolios.
The Market Valuation Factors
The Hybrid approach for patent valuation takes into account the following parameters:
- Market size, and market share of said technology.
- Annual turnover generated by the patented technology
- Absolute profit after applying all taxes and duties.
- Discount factor, which is based upon the risk assessment of the patent.
- Product factor, which evaluates how important the patent is to the overall product.
After evaluating the patent on the basis of these key factors, a Net Present Value is calculated, and corresponding licensing fees or market value is given.
Why Patent Valuation Matters
Patent valuations forms the bedrock of an IP strategy
There might be a case that the patented technology is revolutionary; however, it requires significant changes in current products worldwide to make it publicly available. Even in such cases, the industry might not adopt the patented technology.
If an inventor has an item patented by him or her, the value of the patent would be the amount of money needed to replace that invention. A prospective client would not be willing to pay more for a patent than the amount he or she would have to pay to obtain an equivalent right of protection.
When a business or a person develops a product with the ability to be patented, the fundamental hope is the item being patented will result in a rise in revenue or at least be a cost-saving measure in the business. This strategy states that the value of the patent is the actual cash value of these future advantages.
In other words, the value of the patent is roughly equivalent to the value of previously sold and bought comparable patents or patented products.
For this strategy to be used for patent valuation, two factors must be in place: Existence of an active market for the patent, or a similar one Past transactions of comparable property Look for similar values when searching for comparable patents for the following products: Industry characteristics Market share or market share potential Growth businesses.
The Bottom Line
It must be possible for both companies and investors to account for the value of a patent. Patents, as intangible assets, pose valuation challenge, but they can be crucial in determining the success of a company and the success of investors buying shares from those businesses.