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 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)

Related Articles

• Should I Use a Patent Broker?
• How to Sell or License Your Patent
• Patent Portfolio Strategy
• How Much Does a Patent Cost?