The most common patent-valuation method is the economic-analysis method.
The economic-analysis valuation method has three approaches: cost, income and market:
This approach states that a patent’s value is the replacement cost – the amount that would be necessary to replace the protection right on the invention. The replacement cost of an item refers to the amount of money that would be paid, at the present time, to replace the item. If an inventor has an item that he or she has patented, the patent’s value would be the amount of money required to replace that invention. A prospective client would not be willing to pay more for a patent than the amount he or she would have to pay to obtain an equivalent protection right.
This method looks to future cash flows in determining valuation. It states that a patent’s value is the present value of the incremental cash flows or cost savings it will help provide. When a company or individual develops a product that has the potential to be patented, the underlying hope is that the patented product will cause an increase in sales, or at least be a cost-saving measure in the company. This approach states that the patent’s value is the current cash value of these future benefits.
This methodology involves determining what a willing buyer would pay for similar property. In other words, the patent’s value is the value of similar patents or patented products that have been sold and purchased before. Two things must be in place for this approach to be used for patent valuation:
- Existence of an active market for the patent, or a similar one
- Past transactions of comparable property
Look for similar values for the following items when looking for comparable patents:
- Industry characteristics
- Market share or market share potential
- Growth prospects