How much is a patent worth?
Considering that patents can be costly to file and maintain, and are primarily created for an economic purpose, it is surprising that they are not valued more often. However very few patents are ever properly valued. This is perhaps because it can be costly to do, and partly because patent valuation involves making some large assumptions. In this blog, we look at the common processes used in patent valuation, draw an analog with real estate valuation, and show how objective tools can assist this process.
How do we value a patent?
This is a really interesting question. Generally three techniques are used:
1) Historical Cost – how much money has been spent on the R&D and filing the patent. While sometimes easy to do, this is thought to be quite inaccurate in many cases.
2) By looking at Comparable Transactions – what were similar patents sold for in the market?
3) The Income Approach, ie. working out the value of discounted future cashflow created by the protected invention, and then calculating the patent value based on this.
The choice of method will generally depend on the particular circumstances of the valuations.
OK, this is textbook stuff, and indeed this is detailed in many textbooks. But when you look closer at this, this still leaves a lot of unanswered questions. To expand on this, consider the challenge of valuing a house.
How can we value a house?
Obviously this depends. Just like a patent, this will firstly depend on which country the house is in. Thereafter, we can drill further – which city, which neighborhood, which street.
And clearly these things matter. If we were look at the City of New York say, this is clearly a high value area overall, but then some neighborhoods and some streets within these suburbs are worth more than others, and some streets within these suburbs.
But even then, the street by itself is not enough to form a valuation. If I consider how a valuer might value our house, they would probably say something like:
“#x sold for $X about 6 months ago, and a few doors down, about a year ago, we sold a house for $Y. Your house is a little bigger than the X house, and has an extra bedroom and a newer kitchen. But the Y house is newer and has a home theatre system, and maybe your house is not worth as much as the Y house is worth. So we say somewhere between X and Y, although we note that the market is rising, so maybe something closer to Y than X, say $Z”
And indeed I have seen these types of reports.
What has this got to do with patent valuation? Subjective vs objection valuations
The parallels between valuing houses and valuing patents are surprisingly strong, at least for the most common techniques of Comparable Transactions and Income Approach. For Comparable Transactions, you might look at the sale price of similar patents, and make an assessment of where your patent would fit among these values,
The link from this analogy to Full Valuations might be a little less obvious, but is worth considering further. Imagining that you invented a better mousetrap, and patented it, and built a small factory, and marketed it. Sales went well, and then one day your accountant worked out that the mousetrap was going to make you five million dollars in revenue and one million dollars in profit over the next five years. So how much is the patent worth?
One million dollars?
Probably not. Instead a valuer might say that part of the million dollars of profit needs to be attributed to such factors as a return on the capital you spent building the factory, and a return on the risk of the business. In the process of marketing the mousetrap you probably created a brand, and a trade mark, and part of the profits need to be attributed to the marketing and the marketing IP as well. So how much is the patent worth?
One accepted means of answering the question is to look at the royalty rates for comparable products and comparable patents. These might range from say 2% and 5% of revenue in the case of household objects, for example (royalty rates for different types of inventions are available from some sources). So you just need to pick a royalty rate between 2% and 5%, say 4%, and from this you can work out that the patent might be worth 4% of 5 million dollars, which equals $200,000.
This all very fine, but how did you choose the 4% figure? This question is a little bit like – how does a real estate valuer makes an assessment of where your house compares to the other houses in your street? In the real estate world, they like to look at as many objective factors as possible (# of rooms, land area, age of house etc) before ultimately making an subjective decision. And good patent valuers are the same – while they cannot count how many bedrooms a patent has, they can look at other objective factors that can underpin their final valuation.
How can Ambercite help?
This is one of the reasons why Ambercite has developed Cluster Searching. We assist patent valuers, on a regular basis, in two ways:
- Our AmberScore metric is a quick and simple way of comparing the impact of a given patent compared to its peers
- By looking at the most similar patents and who owns them, you can start to work out who your neighbors are – and even, via our Licensing Potential metric, if they might be potentially interested in your patent.
All of this can help move patent valuation from a finger in the air exercise to something based on as many objective factors as possible. This is why we recommend that people interested in valuing patents use Cluster Searching as part of their valuation process.
Want to try this for yourself?
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If so, please contact us and we will be happy to set up you with trial access. Annual subscriptions are available at a very competitive price, particularly on a per user basis for larger organisations.
“Utilizing a mix of complimentary search techniques is a key to our success in servicing the needs of our clients. While there are many tools available, most provide a broader range of functions rather than the sharp focus of Ambercite on multi-level citation analysis. For us, Ambercite is mission critical by providing us with a state of the art citation based search tool that is best in class.” – Mitchell S. Rosenfeld, Managing Director, Black Stone IP LLC. (Black Stone IP is a boutique investment bank that values and trades technology and IP assets – and was recently selected by Yahoo to sell a substantial part of its patent portfolio)