Patent Valuation Methods

In general the first question before starting patent valuation should be the question of the value itself: Do I need a cost-value (“I spent two millions for my invention.”), an income-value (“We are going to earn about 50 millions with this patent in the next 15 years.”) or do I need a market-value (“I am able to sell this patent for five millions, if I want to.”)? Due to these three different values there are three different valuation-approaches known as classical enterprise-valuation: Cost-, income- and market-approach. IPB is offering all of these types as patent valuation methods.

Cost-Approach

Regarding the cost-approach the patents’ value is equal to the costs for the patent-related R&D costs. This fundamental idea is the core element of all cost-approaches. There are several variations of cost-approaches like discounting the amount of costs by using e.g. the rate of inflation or taking a look at the replacement costs.

The main disadvantage of thisapproach is that it is not really useful for financial transactions, because either the amount of cost is too high so that the patents’ value is overestimated or the amount of cost is too low so that the patents’ value is underestimated. That means the average valuation always fails. Anyhow a cost-approach can be very useful for operation management and controlling.

Income-Approach

Regarding the income-approach the patent’s value is equal to the amount of the future revenues the patent-holder is going to earn by using his patent. By discounting these patent-related revenues on the valuation date the present value can be calculated. The resulting present value is considered as the patent’s value.

The use of the income-approach has two challenges: First the need to have a large database for a reliable outlook on the future revenues for the patent’s lifetime. The second major problem is that there is a need to know exactly which part of the products’ revenue is related to the monopoly right of a specific patent. In some industries like. the pharmaceutical sector this might be easy: There is one active ingredient of a product having one certain market protected by one patent. But when it comes to automotive industries things look pretty different: To find a “one-to-one”-relationship between a patent, a product and a certain value in most cases is impossible.

The need for reliable data makes an income-approach-patent-valuation in most cases quite expensive and -depending on the data’s source- subjective. Therefore the income-approach is not that useful for financial transactions especially the valuation of collaterals. But e.g. for equity investors who are interested in their (future) return on investment (ROI) an income-approach might deliver the information needed and therefore the “right” value.

There are several variations of income-approaches like the real-options- approach. But in general problems and benefits delivered are the same as discussed above for the “simple” discounted-cash-flow-approach.

Market-Approach

At least nine out of ten economists would say that a market-value is always the most reliable and robust value for every kind of asset. It shows what the buyer is willing to pay for the asset and what the seller wants to receive at the same time. So the general idea is to find a similar patent that has already been priced and traded. The actual value/price is differentiated out of historical transactions. But with this approach there are two major problems: First it is not that easy to gather data of patents which are already priced and traded. Second every Patent is unique and only a few are at least a little similar.

In order to solve the first problem IPB has gathered numerous data of patents that are already priced and traded e.g. from expired license-agreements, remunerations of employees’ inventions, patent sales (e.g. out of liquidations), etc. With this number of data the IPB-specialists located value-indicators hidden in nearly every patent-document. With the help of regression analysis significant correlations between indicators and values were identified. Today these parameters are fed into a multivariate-regression-model in which each parameter is supplemented with a ‘personal’ beta-indicator. The beta measures the impact of each parameter on the patent-value. IPB’s valuation result is not a single-price-calculation. It is a value-distribution which shows the probability of realization on the y-axis and the respective value-interval on the x-axis.



One of the advantages of this valuation-method is that IPB is able to collect at least 95% of the relevant data out of public data-bases. So IPB is able to valuate any patent-portfolio without involving the owner. The advantage of objectivity is not only interesting in order to convince any investor or bank but also to collect information about e.g. M&A-targets.

Another advantage is the value-distribution which shows the investor his whole chance-risk-profile and which puts banks in the position that they are able to calculate the value-at-risk which is essential for the credit-calculation.

The IPB-model has been audited by chartered accountant KPMG at the beginning of 2004. The auditors certified the applicability to validate patent-portfolios as collaterals in the financial sector.


Back to ... Patent-Valuation