Imagine adding $7.8 trillion to the U.S. economy. That is what patents and other intellectual property accomplished in 2023, according to the U.S. Patent and Trademark Office. Patents, an essential form of intellectual property, demand careful examination to realize their complete potential. To make informed choices, draw in investment and keep a leg up on competitors, you must understand how to determine what your patents are worth.
My team and I have seen firsthand how effective methods of figuring out what a patent is worth can completely change how a business handles new ideas. It is surprising how many businesses do not take this critical step, thereby missing out on big financial gains and possibilities. Let me walk you through the main ways to assess a patent’s worth: looking at what the market suggests, figuring out your expenses and forecasting possible income. I will go into detail on each of these, pointing out their strong points and weak points and showing when they work best. After reading this, you will know how to pick the best way to find out the true worth of your patents.
Why Patent Worth Matters
Figuring out what your patents are worth is more than just a classroom exercise. You must do it for several important business reasons:
- Drawing in Investment: Possible investors need to clearly understand what they are getting. A well supported worth assessment provides solid proof of the inherent worth within your technology.
- Smart Licensing: When negotiating licenses, knowing the monetary worth of your patents is critical to ensure you are fairly paid for your ideas.
- Mergers and Buyouts: Patents have a big influence on a business’s total worth during mergers or buyouts. To make sure both sides get fair terms, you must find out the real worth of these patents.
- Making Choices Internally: Worth assessments guide choices about research spending, managing patent portfolios and legal plans.
- Getting Funding: A clear understanding of your patents’ true worth can greatly improve your chances when looking for funding from venture capitalists or financial organizations.
The Three Primary Patent Worth Methods
There are three main ways to figure out what a patent is worth:
- Cost Method
- Market Method
- Income Method
Each provides a different way to consider monetary worth. The best choice depends on what is special about the patent and what you want to accomplish with the assessment.
1. The Cost Method: What Resources Did Creation Require?
The cost method considers all the money it took to develop the idea the patent protects. This includes research spending, legal costs to get the patent and any other direct costs from creating the idea. The reason behind this is that a smart investor will not pay more than it would cost to recreate the idea on their own.
When to Use the Cost Method
This method works best early in a patent’s life, especially if the idea has not yet made much money. It also works if the patents are made and used inside the company, because it can be hard to get good market data or income forecasts.
Strengths of the Cost Method
- Simplicity: This method is easy, mostly using past expense information.
- Objectivity: It uses real expenses, making it less open to interpretation than other methods.
- Baseline Worth: It sets a minimum worth for the patent, showing the money that was put in.
Weaknesses of the Cost Method
- Ignores Market Factors: It does not consider market demand or how the competition is positioned.
- Past Costs May Not Show Current Worth: What was spent in the past may not accurately show the patent’s current or future worth.
- Does Not Consider Opportunity Cost: It does not consider the possible profits the patent could create.
2. The Market Method: What Do Similar Patents Sell For?
The market method finds a patent’s worth by looking at the prices similar patents have sold for or been licensed for in the same field. This relies on the idea that similar things will sell for similar prices.
When to Use the Market Method
The market method works best when there is a lot of buying and selling of similar patents. This often happens in areas such as software, medicines and electronics. It also works when patents can be easily compared based on their technology, use and how long they have left.
Strengths of the Market Method
- Real-World Info: It is based on real sales, giving a realistic idea of market worth.
- Market Relevance: It shows how much demand there is for similar technologies.
- Easy to Understand: Most investors and buyers easily understand the idea of comparing prices.
Weaknesses of the Market Method
- Hard to Find Similar Items: It can be hard to find truly similar patents, given that each patent is unique.
- Info Availability: Licensing deals and patent sale information are often private, limiting access to what you need.
- Changes Needed: Even with similar patents, changes may be needed to consider differences in technology, market conditions and specific deal terms.
3. The Income Method: What Income Will the Patent Create?
The income method estimates a patent’s worth based on the income it is expected to produce over a certain time. This includes income from products that use the patented technology, cost savings from using it and licensing income.
When to Use the Income Method
The income method is best when the idea is already making money or when future income can be reasonably predicted. It is especially valuable for patents that directly increase a business’s profits, such as those protecting a key feature or lowering manufacturing costs.
Strengths of the Income Method
- Focus on Financial Benefits: It directly connects the patent’s worth to its ability to generate earnings.
- Comprehensive: It considers all possible income streams, including sales, cost cuts and licensing.
- Looks Ahead: It considers the technology’s future chances.
Weaknesses of the Income Method
- Subjectivity: Income forecasts are naturally open to interpretation and can be affected by biases or unrealistic assumptions.
- Uncertainty: Future results are naturally uncertain and can be affected by market changes, technology improvements and competition.
- Complexity: This method requires detailed financial models and a strong understanding of both the market and the technology.
Picking the right methods of figuring out what a patent is worth depends on several things: how far along the idea is in development, the data that is available and the reason for the assessment. Sometimes, using several methods leads to a more complete and trustworthy assessment. The income method is often preferred because it focuses on real financial returns and looks to the future.
Key Things to Consider for Correct Patent Worth
No matter which method is used, think about the following to make sure you get an accurate assessment:
- Complete Understanding of the Technology: You must completely understand the patented technology and its advantages over competing options.
- Detailed Market Analysis: You must have a complete understanding of the market, including its size, how fast it is growing and who the competition is.
- Realistic Assumptions: Your income forecasts and other assumptions should be based on facts and be reasonable.
- Independent Confirmation: Get confirmation from qualified experts who do not have a personal stake in the result, if possible.
How Patent Attorneys Can Help
Patent attorneys have specialized knowledge that is very helpful in the patent worth process. They can help with:
- Patent Portfolio Assessment: Attorneys can assess the strength and range of your patent protection, which directly affects its worth.
- Violation Analysis: By assessing how likely a patent is to be violated, they can estimate possible licensing income or damages from lawsuits.
- Legal Checks: Attorneys can find any legal problems that could hurt the patent’s worth.
- Protecting your patent: Attorneys can help you to file a patent in India or elsewhere, to make sure your intellectual property is protected everywhere.
What Patent Assessment Costs
The patent assessment cost can vary widely. It depends on how complex the technology is, how much detail is needed and how experienced the assessment professionals are. Basic assessments using the cost method might only be a few thousand dollars, while more detailed assessments using the income method could be tens of thousands of dollars or more. But, considering the smart choices it enables, the investment possibilities it unlocks and the licensing income it can create, a well done assessment is a good investment.
Conclusion
To get the most out of your intellectual property, you must use careful methods of figuring out what a patent is worth. By understanding the cost, market and income ways and by getting expert advice when you need it, you can make well informed choices about your patents and get the most value from them. Ignoring patent assessment is like throwing away money. Spend the time needed to properly assess your patents and enjoy the rewards of your creativity.
