How do you measure patent value?

Methods of evaluating patents for business purposes can be divided into two groups - quantitative and qualitative. Quantitative ways of assessing the value of a patent or patent portfolio attempt to calculate the monetary value of the patent. They fall into three basic categories:

1. Cost method: Cost theory looks at the costs which would be necessary to develop and patent a similar invention, either in-house or externally. This approach is generally used in accounting and bookkeeping.

2. Market method: Market-based methods value patents through comparison with prices achieved in recent comparable transactions. These methods require an active market, a comparable exchange of IP between two independent parties, and sufficient access to transaction price information.

3. Income method: Income-based methods measure the potential income that can be derived from a patent; the calculation of the present value of the patent on the basis of anticipated future income (less interest).

All three methods have their advantages and disadvantages, and the most suitable one must be chosen on a case-by-case basis. It is therefore always a good idea to get legal and professional advice. Here is an overview of the advantages and disadvantages of all three methods:




Cost method

  • patents become visible in the company's books and patent awareness is increased
  • useful indicator of patent value in the case of patents whose future benefit is not yet evident
  • no direct correlation between cost of development and the future revenue of patents
  • future revenue from patents is not considered
  • the cost method can encourage overspending


Market method

  • relatively straightforward evaluation method
  • useful to check the validity of other approaches
  • limited formal markets for IP
  • relevant pricing information not usually public
  • uniqueness of IP makes direct comparison difficult

Income method

  • relatively simple
  • likely availability of required inputs from company's financial statements and market information - may be possible to identify/forecast cash flows
  • can be an uncertain method and subject to subjective assumptions
  • both uncertain and distant cash flows and the discount rate have to be estimated

Different evaluation methods are needed for different target audiences, e.g. prospective investor, internal management, etc.

The preferred method of most companies is the income method.