Learn about the most effective methods for valuing a patent portfolio in contract management, and how to apply them in different scenarios.

The cost-based method has several drawbacks as a method to value a portfolio. First, it does not reflect the future earnings potential of the portfolio. Second, and primarily, the thing being valued is a theoretical portfolio that has the same size, geographical coverage, etc. but not the portfolio itself. A third weakness of this method is the fact that patents are, by definition almost, unique assets, which makes it difficult to justify using a method that doesn’t account for that uniqueness. Having said that, in situations where an arm’s length valuation for transfer pricing in a related-party transaction is required, the cost-based valuation might be the most cost effective and perfectly reasonable.

What are the most effective methods for valuing a patent portfolio?

Patents are valuable assets that can generate revenue, protect innovation, and enhance reputation. However, valuing a patent portfolio is not a simple task, as there are many factors and methods to consider. In this article, you will learn about some of the most effective methods for valuing a patent portfolio in the context of contract management, and how to apply them in different scenarios.

1 Cost-based method

The cost-based method estimates the value of a patent portfolio based on the costs of creating, maintaining, and enforcing the patents. This method assumes that the value of a patent portfolio is equal to the amount of money that would be saved or avoided by owning the patents, rather than acquiring or licensing them from others. The cost-based method is useful when the patent portfolio is mainly defensive, or when there is no reliable market or income data available. However, this method does not capture the potential benefits or risks of the patent portfolio, such as future revenue streams, competitive advantages, or litigation outcomes.

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Karl Maersch

IAM-300 Patent Strategist: Mining, Monetization, Valuation, Strategy
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The cost-based method has several drawbacks as a method to value a portfolio. First, it does not reflect the future earnings potential of the portfolio. Second, and primarily, the thing being valued is a theoretical portfolio that has the same size, geographical coverage, etc. but not the portfolio itself. A third weakness of this method is the fact that patents are, by definition almost, unique assets, which makes it difficult to justify using a method that doesn’t account for that uniqueness. Having said that, in situations where an arm’s length valuation for transfer pricing in a related-party transaction is required, the cost-based valuation might be the most cost effective and perfectly reasonable.

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2 Market-based method

The market-based method estimates the value of a patent portfolio based on the prices of comparable patent transactions in the market. This method assumes that the value of a patent portfolio is determined by the supply and demand of similar patents, and reflects the expectations and preferences of buyers and sellers. The market-based method is useful when the patent portfolio is comparable to other patent portfolios that have been sold or licensed in the market, and when there is sufficient and reliable market data available. However, this method does not account for the specific characteristics or synergies of the patent portfolio, such as uniqueness, quality, or strategic fit.

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3 Income-based method

The income-based method estimates the value of a patent portfolio based on the expected future income that the patents will generate or enable. This method assumes that the value of a patent portfolio is equal to the present value of the future cash flows that the patents will produce, either directly or indirectly, over their remaining life. The income-based method is useful when the patent portfolio is mainly offensive, or when there is a clear and quantifiable link between the patents and the income sources. However, this method requires a lot of assumptions and projections, such as revenue growth, profit margins, discount rates, and patent life.

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Erdem KAYA

Turkish and European Patent Attorney | Turkish Trademark Attorney | Committee Chair at I3PM | Certified Angel Investor
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The relief from royalty method is most often used when valuing IP rights where there is a need to predict a realistic future cash flow and to determine the risk and financial parameters as well as their degrading effects on the future cash flow. Financial track records and/or the results of TAM-SAM-SOM analyses are used to predict future cash flows. In terms of risk parameters, the patented technology is analysed with dozens of questions from various perspectives such as IP, technical, market, team and strategy. As per financial parameters, the most commonly considered parameters are licence rates of similar technologies, tax and inflation rates, CAGR, revenues attributed to the patented invention, registration costs, WACC rate.

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4 Option-based method

The option-based method estimates the value of a patent portfolio based on the option value of the patents. This method assumes that the value of a patent portfolio is not only determined by the expected income, but also by the flexibility and uncertainty of the patents. The option-based method is useful when the patent portfolio involves high-risk and high-reward technologies, or when there are multiple scenarios or strategies for exploiting the patents. However, this method is complex and data-intensive, as it requires sophisticated mathematical models and simulations.

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5 Scorecard method

The scorecard method estimates the value of a patent portfolio based on a weighted score of various qualitative and quantitative criteria. This method assumes that the value of a patent portfolio is influenced by a range of factors, such as technical strength, legal protection, market potential, and competitive position. The scorecard method is useful when the patent portfolio is diverse and heterogeneous, or when there is no single dominant method for valuing the patents. However, this method is subjective and arbitrary, as it depends on the selection and weighting of the criteria, and the scoring of the patents.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Michael Kamau

Finance Controller/Project Manager/Project Accountant
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Additional method to consider when analyzing a patent portfolio: 1. Assessing the legal strength and technical value of the patents. Consider scope of patent protection, potential infringement risks, and the uniqueness and technical superiority of the patented technology compared to other existing solutions.

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What are the most effective methods for valuing a patent portfolio?

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1 Cost-based method

2 Market-based method

3 Income-based method

4 Option-based method

5 Scorecard method

6 Here’s what else to consider

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