By Brian Frank
How does industry value a patent or a patent application? The short answer is it “depends”. It depends on several factors such as what type of industry your invention falls into (ie: a new drug patent will be valued in a different manner than a new software patent). However, there are some fundamental valuation techniques that are used across all industries. The two most common are:
1. Estimated future income (also called discounted cash flow or “DCF”)
2. Market comparables or “market comps”
Let’s start with the income approach or DCF since it’s a little more complicated. This valuation approach tries to estimate how much income your patent will generate over its life (usually 20 years). There are many things which go into this calculation such as;
-market size and growth rate (how many customers are there in years 1-20?)
-market penetration (how many of these customer will by your product?)
-market penetration curve (will more customer buy your product as your brand grows?)
-costs (how much does it cost you to produce your product?)
-net income (essentially your profit per year)
-discount rate (this accounts for risk and the time value of money)
You can essentially use the categories above to build a spreadsheet that projects the amount of profit (net income) your invention will hopefully make over the life of your patent. You then use the discount rate which is a percentage such as 10% that accounts for risk and the time value of money (since a dollar earned 20 years from now is less valuable than a dollar earned today).
You use all these numbers to calculate the estimated value of your invention in today’s dollars. This is called the Net Present Value or NPV and investors love to talk about NPVs.
Don’t worry! There is an easier method.
The market comparable or “market comp” method should be familiar to most of you since that’s what is commonly used to price your house or a piece of properly. Just like you can value a house based on how much a similar house in the neighborhood sold for, you can do the exact same for a patent. When looking at a house you would have to account for things like; square footage, number of bedrooms, lot size, etc.
When valuing a patent based on a comparable, you would have to look at the actual deal or transaction that took place. Was the deal for world-wide rights? How long was it for? Was it an exclusive deal or a non-exclusive deal?
It’s extremely unlikely that you will find an exact match for your patent or the type of deal you are trying to do but you can sometimes get close enough to put a rough value on your patent. So where do you find these comps? Unfortunately that’s the tricky part. There are companies that will sell them to you for a hefty price and consultants that will charge you to do this work. If you want to try to find some yourself, one method that I use is trying to find deal terms from publicly available sources such as United States SEC filings.
All public companies must file financial documents with the United States Securities and Exchange Commission or SEC. Often times these filings will include patent purchases or patent license agreements. So if you can identify some public companies in your invention’s area, you can access their SEC filings and search for terms such as “patent” or “license” or “royalty”.
Another method is to do very specific google keywords searches for “company name + license agreement” or “company name + royalty”. If you play around with google long enough you will eventually find some agreements for patent purchases or license deals that may be useful to you. This takes some time and practice to master.
A third option is to look at company press releases. Often times the companies involved in a patent license or sale agreement will post this information as a press release. Your google search should pick those up but sometimes it doesn’t.
As you can see there are several ways to value a patent or patent application. It should not matter which method you choose but you should at least use one of them. It is always good to have solid data and reasoning behind why you think your patent or your invention is worth a certain value.
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