How to Estimate the Value of Your Patents
Whether your business is large or small, a start-up or well-established, your intellectual property (IP) strategy should always be based on sound business principles. Our Monterey County intellectual property attorneys will discuss IP business strategy in the larger context in another article at another time, but here, we would like to discuss one key ingredient to IP strategy: valuation of your IP, specifically patents. Protecting your IP costs money and should always be viewed as an investment. You want to be sure that investment has a reasonable expected return that well exceeds the costs. That means you need to estimate what income or benefit is expected from your IP — or attributed to the IP — versus what the expected costs will be of protecting it.
To think of this as a mathematical ratio:
Return on Investment (ROI)= (Costs to Protect)/(Expected Value or Income)
As a simple example, if you estimate the cost of prosecuting a single patent through to issuance at $25,000 and you estimate the value of a license to that patented technology to be $50,000, then you would think the ROI would be 50%. But we don’t have enough information to know that yet with any certainty. What if the license is nonexclusive and you can expect more than one licensee at $50,000. What if the $50,000 licensing cost is annual, meaning that the licensee has to pay it every year? These details can make an enormous difference in the expected return. But there are some established models for estimating the value of IP that we can use.
There are three models typically used to estimate the value of patented technology :
- The cost approach values the technology as the cost the buyer would have to pay to solve the problem another way. If the buyer would have to pay $250,000 in R&D to develop a suitable replacement, then that is the cost of this technology.
- The income approach values the technology as the buyer’s cost savings attributed to the acquisition of the technology. If the use of your technology saves this buyer $100,000 next year, then a one-year license should be around that amount.
- The market approach values the technology as the cost a buyer would be expected to pay for something similar. If a related technology was just licensed by another company for $150,000 per year, then your technology might be valued similarly.
There is no good answer to which approach is best. Much of it depends on your business model, how you will license or possibly even sell your IP, and the effective useful life of the IP, among other factors. For some of these models, you may have no idea where the necessary data would come from. E.g. “How do I estimate what it would cost a buyer to develop a reasonable replacement to my patent?” For any model you choose to use, the estimate is only as good as the data available to put into it.
Utilizing the Royalty/License Database
An important tool used in the aforementioned market approach is a royalty/license database. Think of it as a tool for identifying “comps” as you would in real estate to gauge the value of your home before pricing it on the market. A couple of examples of this are ktMINE  and RoyaltyStat . Both of these actually have a number of tools to assist in valuation of IP. However, this only works if the IP you want to value can be characterized in order to identify search terms that locate good comparisons. This is not always the case.
A Protected IP Can Improve Your Company
Lastly, we would be remiss if we did not discuss the impact that patented IP has on the valuation of your company itself. Again, putting an exact number on that is not really possible. However, historically, patent citations have almost always had a big impact on company valuation. This could be more of a superficial reaction than one based on actual analysis.
Consider that it has been estimated that only between 2% and 5% of all patents actually generate licensing royalties and as many as 50% don’t even have strategic value.  Also consider that many companies strategically prosecute patents much like you would diversify your personal investment portfolio. You pick the patentable ideas that you think have the best upside knowing that a good percentage of them will generate no revenue. But the other ones that do succeed generate enough value that more than compensates for the less successful ones.
It's a lot to consider, but then, valuing your IP is not easy and it certainly is not a precise science. Yet the benefits of having an effective and defensible IP strategy for your company can be remarkably beneficial, and can pay dividends long beyond the IP’s useful life.
Have More IP Questions? We Have Answers
The IP attorneys at JRG Attorneys in Monterey County have a long history of not only patent prosecution and litigation, but also in helping our clients craft an effective IP portfolio that fits the short and long-term goals of the company. If you have any questions or concerns about your IP, please do not hesitate to contact us at (831) 228-5619.
 Patents are Assets—Learn How to Value Them, https://www.investopedia.com/articles/fundamental-analysis/09/valuing-patent.asp
 How Patents Impact Business Valuation, https://www.businessinsider.com/how-patents-impact-business-valuation-2011-4