SUBSCRIBE TO FEEDPatents and other Intellectual Property rights are some of the most difficult things to value, mainly because the invention, concept or trademark may only prove its true value with the passage of time. Forecasting a true market value, especially for a technology based invention is not an easy thing to so as similar inventions or concepts can be devised or created in a relatively short period of time. And although a patent generally have a protection period of at last 20 years, the patented product can easily become obsolete must sooner. Taking these realities into consideration, just what means are most applicable in formulating a realistic patent valuation?
As already mentioned many kinds of patents, especially those in the scientific and technology sectors, the values placed on the patent must be constantly revised and evaluated during the patent’s lifetime. As the patent process itself can be a lengthily and costly procedure, various valuation methods include cost methods, option methods, as well as the patented item’s potential use must be evaluated by both the patent agent during the patent’s application, as well as the ones who produce and market the item afterwards. A considerable amount of economic forecasting is also required to try to determine what the eventual demand will be for the patented item, which may seem high at the outset, but in reality may not prove so. In light of these considerations the following valuation methods are usually empowered to assess a patents potential worth.
- Cost methods – cost methods are based on a number of factors, including acquisition costs, depreciation, obsolescence (very important in technology based patents), and allowance for future benefits that may be incurred from the use of the patented invention.
- Market based methods – these methods include comparing royalty costs for similar patents, market forecasts and surveys, and calculation of the patented product of the marketing firm against it’s residual value after deducting the value of all known assets from the market value of the producing company. In any respect, marketing methods are nothing more than sophisticated forecasts of potential market growth.
- Income methods – Future income from a patented product can be based on forecasting future cash flows generated by the sale and revenue return on the patented goods over a period of time. Royalty rates paid by a patent licensee are also a factor in determining the total income generated by a patented invention.
- Accounting flexibility and option pricing of patent are also important factors to consider in assessing a patent’s true value.
Changing risks are also important factors involved in valuing a patent’s eventual worth. A good example concerns the fledgling computer software company, Mircosoft, during the mid 1980′s when it’s CEO, William Gates, pitted his relatively unknown software product, Word I, against the already successful Wordperfect product. Taking present realities into consideration, changing risks factors proved Microsoft’s product to be the eventual dominant one in the computer software market; and as the time worn saying goes:
“the rest was history”.
Written by IP Patent News
Source: Robert Pitkethly – The Said Business School, University of Oxford
