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Patent Valuation Methods

From WikiPatents

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 tricky—especially 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)

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