What is patent valuation?

Patent valuation is the analysis of the economic value of a patent or patent portfolio at a given date using technical, legal, commercial and financial data. A patent registration does not by itself mean high economic value. The scope of protection, legal validity, remaining term, market demand and income-generating potential are assessed together. A patent right serves to prevent unauthorised commercial use by third parties under certain conditions; it does not mean the product can be marketed without infringing other rights. A valuation report does not by itself mean that investment or financing will be obtained.

Factors that determine patent value

• Registry and ownership status
• Risk of invalidation
• Scope of protection of the claims
• Remaining term of protection
• Annual fees
• Countries where the patent family is protected
• Advantages offered by the technology
• Substitute solutions
• Customer demand
• Income-generating capacity

Patent valuation methods

• Income approach and discounted cash flow (DCF)
• The income approach discounts the future economic benefits expected from the patent to present value. In the DCF method, the patent-related net cash flow for each period is calculated using an appropriate discount rate that reflects the risk: Present Value = Σ Cash Flow / (1 + discount rate)^period.
• Assuming a net cash flow of TRY 1,000,000 per year for five years and a 20% discount rate, the result is approximately TRY 2,990,612. This is only a method example; it is not an actual patent valuation.

• Relief from Royalty
• This method is based on the hypothetical licence fees the business would be expected to pay if it did not own the patent. For example, TRY 20 million in relevant sales and a hypothetical 4% royalty rate produce a gross licence equivalent of TRY 800,000 per year.
• Tax, growth, term of protection and discounting effects are assessed separately. The rate in the example is not an industry standard.

• Incremental earnings and cost savings
• Where the patented technology creates a price premium, increased sales or a production cost advantage, scenarios with and without the patent are compared. The share of this benefit attributable to the patent is justified. The contributions of other assets such as know-how, the trademark, customer relationships and production capacity are examined separately.

• Market approach
• Comparable patent transfers and licence agreements are examined. Adjustments are made for differences in technical field, country coverage, remaining term, exclusivity of the licence and commercial stage. Because most patent transactions are confidential, reliable comparison data can be hard to find.

• Cost approach
• The current costs required to redevelop the technology, or to create a solution providing equivalent economic benefit, are examined. Past R&D expenses are not directly the market value of the patent. Technological obsolescence and economic usefulness must also be taken into account.

• How is a valuation method chosen?
• Where income forecasts are reliable, the income approach can be a strong reference. If comparable transactions exist, the market approach can be used. The cost approach can be helpful especially where other data is limited. Using more than one method together can help test the consistency of the results.

The patent valuation process

• Purpose and date: The purpose of the valuation, its date and the basis of value are determined.
• Data collection: Patent documents, claims, registry records, licences, the patent family and commercial data are collected.
• Technical and legal review: The patent is reviewed from a technical and legal perspective.
• Market analysis: The market, competitors and alternative technologies are analysed.
• Financial model: A financial model is built using the chosen method and a sensitivity analysis is carried out.
• Reporting: The result is reported together with its assumptions.

What does a patent valuation report include?

• Purpose and date of the valuation
• Legal status of the patent
• Technical analysis
• Market review
• Methods used
• Data sources
• Cash flow or royalty assumptions
• Discount rate
• Scenario and risk analyses
• Value conclusion and its limitations

Licensing, technology transfer and portfolio

• Patent licensing strategy
• Exclusive or non-exclusive licences, territorial and field-of-use limits, contract term, sublicensing, upfront fees, sales-based royalties and minimum payment obligations all affect economic value. A valuation provides a basis for negotiation; the final licence fee may differ depending on the parties’ agreement.

• Technology transfer and patent portfolio
• In university–industry collaborations, a patent may be transferred together with technical know-how, software and production experience. Attributing the entire transaction price to the patent may be wrong. Because complementary patents in a portfolio may generate shared income, simply adding up individual patent values may lead to double counting.

International standards and accounting

In intangible asset valuations, the relevant International Valuation Standards (IVS) framework may be taken into account. TMS 38 concerns the accounting of intangible assets. Economic value and the amount recognised on the balance sheet are not the same. ISO 10668 and ISO 20671 are standards relating to brands; they should not be presented as patent valuation standards.

Risks in patent valuation

Technological obsolescence, expected sales not materialising, disputes over validity and ownership, regulatory approvals, third-party rights, missing data and the choice of discount rate all affect the valuation result. Freedom to market a patented product may additionally require a freedom-to-operate (FTO) review.

Patent valuation fees

The service fee varies with the number of patents, technical complexity, country coverage, data access, the intended use of the report and the level of analysis required. A preliminary assessment of a single patent and an independent financial valuation of a multi-country portfolio do not have the same scope.

Patent valuation with Kupon Patent

Kupon Patent offers advice on reviewing the technical and legal characteristics of patents, preparing data for economic valuation, and supporting licensing and portfolio decisions. For work requiring independent financial valuation, tax or judicial expertise, the relevant professional qualification requirements must also be observed.