The reasons are many and vary considerably. Examples include: litigation, strategy determination, mergers and acquisitions planning, IP financing, financial reporting and tax compliance. Although patent valuation has entered the corporate finance 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 daunting.
There are generally three approaches to valuing patents:
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 valuations determine the 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, and 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 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, from individuals, and in bankruptcy auctions and distress sales. Non-practising entities also buy patents from individuals, failed companies, or from operating companies that want to generate cash or to engage in patent privateering. Actual patent pricing is challenging to compute 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 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; an average market price can be modelled according to current market conditions. Importantly, the approach also avoids erroneous assumptions 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 the problem and are leveraged as an absolute prerequisite for valuation.
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. Furthermore, the system is not constrained by the number of patents and supports portfolios of any size. Patent family members are also factored into the final formulation to provide a fair market value equivalent for any given portfolio. The valuation can further 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 unrivalled and effective systematic data-driven solution.