At various points within the patent lifecycle, it is crucial to determine an accurate patent valuation. This isn't always easy because a patent is an intangible asset. However, because intangible assets can often represent between 70-80% of your business' market capitalization, the valuation of your patents must reflect their true value to your enterprise. Failing to value your patents correctly can send legal and accounting issues rippling throughout your business. It can also result in considerable losses if the value of the patent and anticipated sales do not provide sufficient profits following expenses for development, production, and distribution.
Arriving at the Right Patent Valuation
There are several ways to arrive at a correct valuation, and the method you should choose depends on the type of patent and your intended goal. The first option is the cost method. It is the simplest method because it involves estimating the replacement cost of the invention. The cost approach also considers the novelty and economic impact the product will generate.
The second option is the income approach. Using this method, business owners estimate future cash flow when determining the value of the product to the company. Using the present value as a baseline, you can calculate the value of the patent by forecasting related licensing revenues or product sales increases attributable to the patent's underlying inventive concepts. Because this method requires considerable forecasting, it is vital that each input within the equation be realistic and aligned with current sales data. It is best used when there is a sufficient history that can be included in the valuation.
Finally, businesses can employ the market approach. This requires estimating the price at which a potential buyer would be willing to purchase the patent. This method is best suited for patents that are similar in size and scope to existing patents owned by the company or its competitors. This approach requires a thorough examination of industry characteristics, existing and potential market share, and prospective growth.
Monetizing the Patent
Accurate patent valuation is crucial for monetizing your patent. Prospective partners, buyers, and licensees do not want to buy patents whose values are inflated. Thus, you must verify and support your valuation prior to any attempts to monetize the invention.
There are numerous options for monetizing a patent. These include issuing exclusive rights, limited exclusive rights, and licensing. For each of these options, other parties to the transaction will want to know how you arrived at the correct patent valuation. This will weigh heavily on their decision to accept your offer. Thus, it must be backed by reliable evidence and solid estimates.
When we perform a patent valuation, we thoroughly compare the patent to as many data points as possible. This gives you solid evidence establishing that the valuation is correct and that the price you are asking to receive is fair and aligned with industry standards and market conditions. To that end, we work with our clients to arrive at valuations that meet your corporate goals, fit within your business model, and give you the ability to profit from the increased distribution and sales of your product within the market.
Contact Global Patent Solutions at (877) 274-2011 to learn more about the steps we take to help our clients arrive at an accurate patent valuation. It is our pleasure to answer your questions and help you determine the best approach to pursue.