Patent Attorney and Founder
So, you’ve got your patent issued, and maybe you can have a portfolio of patents, but what are they worth? What is the true valuation of your patent portfolio? Hi, I’m J.D. Houvener, owner and founder here at Bold Patents Law Firm. Today, we’re going to go over three fundamental ways of evaluating, as well as two more advanced ways, patents are valued in today’s economy. So let’s jump right into it.
The first way, these are three fundamental ways that patents are valued. The first way is cost, and this is a basic, easier way to measure value, looking at how much investment has there been in the invention itself. So if you look at all the costs related to forming, actually getting the invention developed, or if it’s testing it, hiring an attorney to protect the patent, doing research and development, and maybe customer tests, beta tests, or even some of those more sticky FDA-required clinical trials, or whatever you’re going through in order to bring your product to market. All those costs, those investments, those can be attributed to at least a base level value. There is some trouble with this assessment because there’s this assumption that all the costs that have been put into the patent that go toward the research and development that it’s actually going to be worth that on the market. There is that base assumption like, hey, okay, I purchased this house for X amount of dollars; at least it’s going to be worth X when I go to sell it. That’s the basic fundamental premise with the cost method, that all the inputs, all the research, all the time and effort, energy, and money that went into developing this patent portfolio is what it’s worth now, at least this much. It’s a conservative approach.
Number two, market assessment. Looking at not just how much investment is, but what is the true, actual sale, looking at other published sales that have been recorded and shared with the public. What are other licensing deals that are currently being done or have been done recently to look at what’s evaluation if I were to go to market and sell my license or sell my portfolio outright or to license it? The trouble there is that a lot of deals are done in confidence for good reasons; they don’t want to necessarily say what they’re selling for. But there are ways to get that information through confidential sources, and sometimes it’s a great way to see okay, how much is this actually worth and then going looking at what the market currently brings for these types of products.
The third fundamental way of valuing patents is the income method. Now, income has to do with forecasts usually unless you actually have income around your product or service. If you want to try to value your patent portfolio pre-revenue, you’re forecasting, and that is considering what is the cost to make the product, you know, the cost to get the product, what’s called landed. What is your prospective margin, and what’s your forecast, your projections for your sales, and that could be for one, two, three years? Now the issue there is that accountants that perform these types of valuations will need to do a present-day calculation. You can’t just acquire income out, you know, 10, 20 years. What is that in present-day valuation? So, they’re going to bring back the time value of money into the current day. It’s all calculated based on what the present current day evaluation is based on what the projected income will be. Now, this does come with a lot of hypothesis and best guesses in terms of how the market will perceive it, how the cost might go up or down with supply and demand with raw material goods. All of those are all variables that go into that calculation. That is probably the most common one is the income stream method.
So, we’ve talked about cost, market, and income. Those are the fundamental ways of valuing a patent or patent portfolio. There are two more complicated ways. The first one is what’s called an option-based valuation. This is sort of akin to the financial markets where you will consider the value, right, the patent itself, and there’s this option similar to what a financial put would be if you’re familiar with financial terms. It’s this ability not to be obligated but to have an option to purchase or sell and exploit the patent down the road. This is sort of like a packaged, you know, contractually defined option that you can sell and go to market with. That is what’s valued is what is that specific type of option worth. This is usually the way that very high growth or very high-risk inventions in the biotech or pharmaceutical industry are valued at times because there’s so much volatility with respect to, you know, large sometimes even political issues that can arise with laws that are passed or with policy change with respect to Pharmaceuticals specifically. That’s why options can be the best option to value more high-tech, biotech, those sort of inventions.
The second fairly complex way to value a patent is called Monte Carlo. Monte Carlo, you know, not time, we’re going to the casino here; we’re talking about Monte Carlo in the simulation. So, using computer aid to run thousands or maybe even millions of potential scenarios where you put in lots of lots of variables, maybe even hundreds of variables with respect to market conditions, technology fluctuations, global warming, different variations in foreign exchange and currency, to see okay, what are the different ways that this could go to market? And what’s the average among all these various different potential scenarios, and looking at the most rare, you know, super, I don’t know, touchdown, best potential options as well as some of the lower, really undesirable options for valuation, and coming up with this really robust computer-aided way of simulating all the different options that are possible. Of course, there’s a lot of investment in actually hiring a CPA or even a specified company that will perform this type of Monte Carlo analysis for you. So, it’s usually for companies that have a sizable patent portfolio that can do these types of analyses. But in any way, there are ways to value a patent even pre-revenue, right, even before you’ve actually gone to market. You want to know what you might build, sell it or license it for.
The three fundamental ways, as we talked about today, are the cost method, looking at what all the different ways that money that I put up already to kind of put a baseline, okay, at least it’s worth what I’ve invested. Option number two, and the fundamental is the market approach, where you’re looking at published, you know, publicly available licensing agreements or sales of patents or portfolios, so you can see, I feel like my patent is a lot like that one, and it just got sold for x amount of dollars; mine is worth at least that. The third fundamental way is the income approach, as I mentioned, looking at forecasting what your sales are going to look like, what the margins are, and the overall net valuation there. So, those are the three basic ways. I hope you all learned something about evaluating patents today, and if you’re brand new to this and you want to get started, I encourage you to please book a link. Click the link below and subscribe to our channel. That link is a discovery call to see if now is the right time for you to move forward, to see if patenting is the right thing for you, trademarking as well. We’re happy to help with any questions you have. So, I wish you guys a wonderful day and a great week ahead. Go big, go Bold!