What is Patent Valuation?
Patent valuation is assigning a financial value to a patent during the innovation process, which helps cement its monetary worth as a way of concretely defining its competitiveness and tradability. However, a patent needs to be infringed upon first before it can contain actual value, as infringement indicates market viability and use. Before that happens, a patent’s value is speculative only.
Some of the factors that comprise patent valuation include:
- The cost of bringing a patent to market
- The amount an infringer might pay of the wholesale price
- The feasibility and timeline of enforcement
- Its competitive advantage.
There are multiple ways to calculate a patent portfolio valuation, with the right approach depending on the results’ use. For example, patent valuation tools from a sales perspective could include assessing the product or service’s future price, what the lifetime expected sales might be, and how the revenue is divided up.
Another way to value a patent might be to use patent valuation software to calculate necessary expenses to gain patent approval, factor in tax requirements and credits, and how much money is allotted to damages, such as failed experiments or re-work.
In essence, patent valuation is calculated either quantitatively or qualitatively, with pros and cons to each. For example, using the cost method to construct a quantitative patent valuation model using the cost method would have the advantage of creatively rerouting costs in other areas, but a drawback might be the exclusion of secondary benefits or full future earnings growth.
Other Names for Patent Valuation:
- Intellectual property (IP) valuation
- Patent appraisal
- Patent assessment
- Patent appraisement
- Patent evaluation
Why is Patent Valuation Important?
Patent valuation is important because these assets can be bought and sold the way tangible properties are, and thus the patent or patent portfolio needs a valuation to secure the appropriate amount of funding and to generate revenue.
Depending on the use of the IP, valuating the portfolio is calculated various methods and strategies. Even businesses that own no patents can make use of patent valuation software to increase their revenue, such as using a business’s patent portfolio to incorporate the data into their own revenue models. For example, the pharmaceutical industry makes great use of expired patents with generic manufacturers picking up drugs that have gone off patent to massively boost their own sales. Other industries can use patent valuation tools to decide if buying a license – instead of expending their own time, money and effort into obtaining a patent – is the more fiscally appealing choice.
Another important factor to consider with patent valuation is how it affects mergers and acquisitions (M&A). For a company to make the most informed decision possible, knowing another company’s true patent portfolio valuation is key to things like securing financing, licensing patents, handling potential conflicts, and developing internal strategies.