Patent Valuation

What are my patents worth?

Patent valuation is not an exact science and it’s not even an art. It is a very specialized activity and can vary somewhat depending on the assumptions and the methods employed. Patent valuations are frequently utilized and sanctioned by boards, sellers, buyers and investors of patent portfolios. It must be realized that a patent valuation depends upon a series of techniques that can differ widely in their accuracy due to so many unknown conditions. And patents are regarded by financial rules as intangible assets, which makes it even harder to assign a monetary value to them.

At Kanzatec we are primarily involved in the monetization and valuation of high tech utility patents. These differ from the other two types of patents which are plant and design patents. In brief, a design patent protects the design, or improved appearance or shape of an invention e.g. Apple’s design patents. It enhances the existing product’s style and not its function and lasts fourteen years from the date of grant. A plant patent relates to a new variety of plant discovered by its inventor. It lasts twenty years from the date of filing and if asserted, may prevent others from selling or using the plant.

This leads us to utility patents, which last twenty years from the date of filing, and give their inventor, who has discovered a new or useful process, software or machine or a functional improvement to an existing invention. Most importantly, when valuing patents we must acknowledge that a patent is an invention right. What that invention right is worth to its creator, user, buyer, licensee or licensor (including non-practicing entities extracting licensing revenue) will depend on so many things including infringing products, revenues, future potential, litigation landscape and trends. Even changes in the legal viewpoint including rulings such as the Alice Corp. vs. CLS where the Supreme Court unanimously ruled that software patents covering abstract ideas must do more than merely append the term “on a computer” to make it past the initial review of patent eligibility.

Why Value your Patents?

Establishing a value for your patents enables your company to enhance decision making related to these strategic assets. This can be particularly useful when assessing the value of a patent portfolio which is to be sold, licensed or acquired. It is also a useful resource during capital raising and due diligence, for instance in a prospectus for a private offering or an initial public offering (IPO) or in a divestment.

  • Valuation support for corporate decision making
  • Confirming which assets are key value drivers
  • Patent Monetization, Debt & Equity Financing
  • M&A Pricing
  • Bankruptcy or dissolution proceedings

 

Advantages of a Patent Portfolio Valuation

A key advantage may be to increase the profitability of your business through licensing, selling or raising finance against the patents. For high tech firms that are technology driven, a patent valuation can better establish the net worth of the business; especially if it is an intellectually rich organization i.e. excellent people, skills, technology, IP (patents, copyrights or even trademarks) but perhaps less value held in customers, revenues, brand (trademarks could be a significant or insignificant component here), channels.

Patent Valuation Approach

In high tech (non-bio, pharmaceutical) situations the patent portfolio can be seen as being valuable from three example perspectives:

1)      Strategic value

This may comprise the ability to utilize the patent to exclude competition or shut down a competitor’s product (rare and hard to do) or be able to negotiate when licensors attack the business or in other defensive maneuvers.

2)      Licensing value

This is calculated using an income approach that uses future cash flows in determining valuation i.e. The patent’s value is the net present value of the sum of all the incremental cash flows that licensee’s of the patent would provide through up front and/or royalty payments.

3)      Outright sale value

What will the patent fetch in an outright sale for cash? This can be calculated using a variety of methods but includes many judgment calls regarding market demand and relevance to target companies and products, as well as the prevailing market pricing conditions and the litigation landscape. Many times ‘comps’ or comparables are used to set an approximate range of value or used to triangulate or corroborate any purely analytical conclusions.

Ultimately, however, the outright value of a patent portfolio at a specific time is a function of the demand and the willingness of a buyer (dependent upon unique value seen by that buyer) and only applicable for that specific range of time as business buyer needs can vary from quarter to quarter.

Other Patent Valuation Considerations

Some firms utilize patent valuation methods that might value the patent as its replacement cost – not the cost of prosecution, but the cost of needing to replace that invention right and possibly the actual invention if the lack of that invention right means the invention is untenable as a market success.

Expertise in Undertaking a Patent Valuation

Generally there are five areas of expertise deployed to undertake a patent valuation:

Patent Valuation Assessment Factors

 

 

 

 

 

 

As an example consider the undertaking of a technical analysis of your patents and portfolio. This may comprise the preparation of indication and evidence of use documents and use a methodology that might measure several significant factors in assessing patent value. Examples of some of the factors used to analyze the value may include but are not limited to:

1. Prior art

2. Observability/method of detection

3. Industry demand – Industry actions/trends – who is suing whom

4. Technology area

5. Quality of patent; strength of claims

6. Health of patents and apps (due diligence health check)

7. Who is a licensee? What cross licensing if any?

8. Expiration

9. Workarounds

10. Applicability (today and future)

In legal validity analysis, key documentation would be reviewed including file histories such as prosecution history and chain of title.