Patent owners routinely ask: “How much is my patent portfolio worth?”
The reasons are many and vary considerably. Examples include: corporate valuation, mergers and acquisitions planning, and financial reporting. Although patent valuation has entered the corporate mainstream, surprisingly many companies fail to effectively valuate their portfolios. Methods differ and can easily result in a significant uncertainty in the valuation. While the costs for the development and maintenance of a portfolio can be determined with relative ease, the actual valuation of a portfolio is far more challenging.
There are generally three approaches to valuation:
- Cost approach
- Income approach (based on earnings and risk expectations)
- Market approach (based on comparable sales)
The cost approach uses the costs to develop a patent application and the cost of getting a granted patent; it has no relevance to prospective buyers or licensees. It is rarely an accurate measure of the ultimate value, although it is a preferred method for accountants. Many companies use the cost approach even though it is widely recognized as the least effective method to formulate patent valuation.
Income-based valuation is based on the net present value of future income anticipated to be generated by specific patents. This approach relies on forecasted financial results, an analysis of the competitive landscape and an examination of industry trends. The model depends on several key assumptions such as royalty rate and projected revenue; as such the results can vary significantly. Despite these challenges, it is usually the preferred and most accurate method for determining the value for a small number of related patents. However, it is practically impossible to apply the approach to a large portfolio of diverse patents.
The market approach is the most direct method for portfolio valuations. The technique relies in part on the efficiency of the market to properly value the patents and is the most effective method for valuing fairly comparable assets within an active market for instance, listed shares or real estate. The approach can be applied to patent portfolios, provided that comparable assets and active market parameters are intelligently applied.
This approach requires an active market for the patents and uses publicly available patent transaction information to provide an indication of value based on the value of other similar patents. Fortunately there is a vibrant market for purchasing patents. Operating companies buy patents from other companies, organizations and individuals. Non-practicing entities also buy patents from individuals, failed companies, distress sales, or from operating companies that want to generate cash. Actual patent pricing is difficult to determine since most transactions are privately conducted. Similarly, in mergers and acquisitions, a separate value for the patent component of the deal is rarely available.
Fortunately a public market for patents is available and derived from recently brokered patents. Not all brokered patents are sold and usually not at the asking price. However an average market price can be modeled according to recent transactions and current market conditions. Importantly, the approach avoids erroneous assumptions and extreme valuation swings stemming from an imputed royalty rates and/or revenue projections.
The public market for brokered patents provides added inherent importance. To ensure economically feasibility, brokers invest significant resources on screening patents and only select high value patents to produce quality patent sale offerings. Most will further produce Evidence of Use (EoU) for their sale offering packages.
The challenge in applying the approach has been the determination of comparable assets. While brokered patents represent A-rated patents, the value for patents in a portfolio are unknown. Typically a superficial “value per patent” estimate is applied, which is highly unreliable. Pelent Patent Ratings solves this problem and is an absolute prerequisite for valuation.
Patent Portfolio Valuation – Our Approach
Our AI powered system thoroughly analyzes each patent and each claim; the resulting Patent Ratings are then combined with market pricing to derive the appropriate weighted value for each patent. Patent attributes are also factored into the final formulation to provide a Fair Market Value Equivalent (FMVE) for any given portfolio. The valuation can be recompiled and monitored periodically to reflect current market conditions and changes in the portfolio.
Valuation is essential for any business, particularly for companies that invest hundreds of thousands of dollars on their portfolios. Whether your goal requires portfolio valuation or discovering valuable portfolios, Pelent provides an unrivaled and effective systematic solution.