Patent Valuation Methods
Patent Valuation Methods
Understanding the value of a patent is essential for licensing, fundraising, litigation, or M&A negotiations. But valuing intellectual property can be trickyâespecially if the patent hasn't yet been commercialized.
Why Patent Valuation Matters
- Helps set licensing or sale prices
- Supports investor negotiations or funding rounds
- Assists with accounting, taxation, or insurance
- Provides leverage in IP litigation
Common Patent Valuation Methods
1. Cost-Based Method
Estimates how much it would cost to recreate or develop the invention from scratch.
Best for: Early-stage inventions or internal audits.
Pros:
- Simple to calculate
- Based on tangible expenses
Cons:
- Ignores market potential or competitive value
2. Market-Based Method
Looks at prices paid for similar patents in recent transactions or public sales.
Best for: High-demand tech spaces or patent portfolios with known comparables.
Pros:
- Grounded in real-world pricing
- Transparent when data is available
Cons:
- Hard to find comparable transactions
- Market data may not be public
3. Income-Based Method
Estimates the future cash flows a patent could generate, then discounts that back to present value.
Best for: Patents linked to products already earning revenue.
Pros:
- Considers real business potential
- Flexible and widely used by investors
Cons:
- Requires solid revenue projections
- Sensitive to assumptions
Additional Methods
- Option-based valuation: Treats a patent like a financial option (advanced)
- Qualitative scoring: Evaluates based on technology impact, litigation history, breadth of claims, etc.
Who Performs Patent Valuations?
- IP consultants or valuation firms
- Patent attorneys (for rough estimates)
- Accountants or IP auditors (for tax and compliance)
Related Articles
- Should I Use a Patent Broker?
- How to Sell or License Your Patent
- Patent Portfolio Strategy
- How Much Does a Patent Cost?