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PATENT VALUATION METHODS

The three different approaches Cost-, Market and Income are often described in the literature, standards, and accounting principles with also different variations like the used calculation methods. All of them originated outside the field of intellectual property (IP) valuation - and this has to be kept in mind, when applying them on your own. The following nutshell-overview is intended to get a first idea about patent valuation methods in general. It is completed with two other techniques that are often found in particular in patent valuation.

See below the following methods described:

  1. ​Cost Approach (all aggregated costs associated with the invention)

  2. Market Approach (patents are treated as tradable assets)

  3. Income Approach (net present value of future economic income, adopted to patents)

  4. Indicator-Based Approach (qualitative evaluation only)

  5. combined Indicator-Based Market Analogy (Market Approch adopted to patents)

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Find more insights in our patent valuation Q&A and in our Blog "Patent Insider". We would be happy to discuss your specific case and recommend you the best procedure, depending on objectives, timeline, current status and budget. Get in touch.

COST APPROACH

General description

This method  has it's roots in accounting rules in which the replacement value of a good is determined. All costs associated with the invention are aggregated, provided they can be directly attributed to an invention. It reflects the historical expenses incurred to create the asset.
It is to mention that only development costs, not research cost can be attributed. Therefore, these costs must also be recorded separately internally.

​​This method is suitable if you want to activate patents on the balance sheet and the accounting standard provides for this method (e.g. HGB)

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  • if internal and external costs are already recorded well structured and these can be linked to a certain invention, the values are easy to determine

  • approach is aligned to certain balancing standards (e.g. German HGB)

  • objective (at least for internal purposes)

  • all patents can be valued, also blocking patents that don't generate direct revenue as long as costs are accociated

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  • according to the approach, the value of the patent increases over time as accumulated costs (e.g., maintenance fees) grow. However, since the remaining term of the patent simultaneously decreases, the overall value trend is expected to decline as the time for potential economic utilisations shortens.

  • lack of market relevance

  • ignores future income potenial
  • no consideration of competitive advantage
  • cost value does not reflect the true value: High valuable patents are typically valued too low, worthless inventions too high
  • value depends on the cost recording method and date of its implementation
  • the cost assignment must be absolutely accurate

MARKET APPROACH

General description

This method, also called "Market Analogy Method" has its roots in real estate and tangible asset valuation, where it has long been used to determine the value of assets based on comparable market transactions. In this context, the market approach is well-suited for determining what buyers are willing to pay for similar assets, providing a direct indication of "fair market value." Here, patents are treated as tradable assets, and their value is estimated based on comparable transactions of similar IP assets.
This approach can be combined with the indicator-based approach in order to find more and better comparable references (see Indicator-Based Market Analogy).

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  • also blocking patents that are not directly in use can be valued

  • „fair value“ is according to all norms and also accounting standards (e.g. IDW S5)

  • market value is a potential trade value

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  • key idea of patents is uniqueness - finding  corresponding patents is very difficult, similar inventions can be used as a best estimate

  • data availability: patent trading prices are rarely published

  • alternatives not useful when e.g. a standard is involved in the reference

  • expensive, time consuming

INCOME APPROACH

General description

The income approach originates from the fields of finance and investment valuation, where it has been a fundamental method for assessing the value of income-generating assets. Its development is closely tied to the principles of discounted cash flow (DCF) analysis and capital budgeting within corporate finance, which focus on estimating the present value of future earnings.

Hence, it evaluates the present value of future economic benefits generated by the patent, such as income streams from product sales, services, or royalty revenues. Strictly speaking, this method values a business scenario in which the invention generates measurable income. Accordingly, the method must be adapted to the IP world. For this we use the relief from royalty approach (RRM). Put simply, the approach assumes that the patent belongs to a third party and would have to be licensed in for the business case. The potential investment risk must also be priced in. The risk-adjusted present value of the fictitious licence costs then corresponds to the patent value. The procedure corresponds to the SIGNO-standard for patent valuations.

This method is suitable if you wish to demonstrate the value potential of your patents, e.g. to attract investors.

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  • completely transparent and therefore verifiable process

  • meets current standards

  • various scenarios can be used

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  • revenue assumptions are estimates, but actual developments are uncertain

  • difficult with blocking patents that are directly in use/indirect revenues

  • value difficult to transfer to another owner (e.g. different market access)

  • it is not carried out correctly in many expert opinions (e.g. incorrect discounting), but the error is only recognised by valuation experts

  • expensive, time-consuming due to a lot of research

INDICATOR-BASED APPROACH

General description

Unlike the other methods, the indicator-based approach does not assign a direct monetary value. Instead, it provides a qualitative or comparative assessment, allowing the relative comparison of individual inventions or patent portfolios. This method relies on specific, potentially weighted indicators (such as technical significance, legal robustness, or market applicability), which are chosen to reflect the patent’s overall quality or potential impact.

This approach is recommended when monetary valuation is not feasible or necessary, as it offers a structured means to compare patents based on selected criteria.

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  • flexibility and adaptability

  • useful for a qualitative comparison when the focus is on assessing the relative strength of different patents or portfolios

  • applicable to early-stage or non-revenue-generating patents

  • simplification by focussing on key qualitative factors

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  • subjectivity through the choice of indicators and, in the case of manual ratings, their weighting and evaluation may be biased

  • no monetary, only comparative value

  • manipulable through targeted selection of certain (key) indicators

  • not useful in financial reporting, lending, transactions or attracting capital

INDICATOR-BASED MARKET ANALOGY

General description

The approach is a combination of the Indicator-Based Approach with the Market Approach and is specifically designed for the use case of patent valuation. It combines the precision of the Market Analogy Method, being based on empirical data, with the simplicity of the indicator method. The selection of the same indicators for all patents and a very broadly diversified indicator base covering all areas counteracts the problem of subjectivity and manipulability. The abstract description with more than 90 indicators addresses the problem of not finding direct reference patent-transactions. For the value calculation, a mathematical approximation approach is used that combination a rule-based method with a machine-learning technology. This approach combines patent law expertise with empirical data to determine the best approximation with the lowest average deviation, which, based on experience, leads to the highest predictive accuracy. The calculation also allows different scenarios to be taken into account, e.g. the calculation of a liquidation value resulting from, among other things, the particular weighting of certain indicators such as competitive activity.

This method is recommended if you plan any kind of (internal or external) transaction of the patent, family or patent portfolio or if you want to use them as collateral for debt-financing. Also, if you need to calculate a liquidation value, this is the best method.

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  • very easy to apply

  • fast & affordable due to very structured and clear process

  • „Fair Market Value“ is according to norms and also accounting standards (i.e. IDW S5)

  • market value is a potential trade value, perfect in case of any transactions

  • high prediction accuracy due to the empiric data basis

  • different valuation scopes possible

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  • intransparent

  • limited acceptance due to lack of transparency
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