Valuation of Patents

A patent is a set of exclusive rights granted to an inventor or their assignee for a limited period of time, in exchange for the public disclosure of the invention. An invention is a solution to a specific technological problem which helps in inventing something new or which helps in increasing the efficiency of a process.

In the current context, the intangible plays a significant part in creating value preposition of the company. The business value covers both the tangible and intangibles. Valuation of intangibles becomes relevant when there is a need to do purchase price allocation i.e. when you want to allocate the excess of the consideration paid for acquiring the asset over and above the tangible assets.

Historically the excess consideration paid over and above the tangible assets is adjusted as goodwill, however if we can identify the tangible assets of business then allocation of value can be made to it and post this balance left is considered as goodwill.

In the books of account the intangible finds a place if it is acquired from outside, however if it is self generated then its impact is not considered in the books of account.

Valuation of patent
Traditionally, there are three approaches to valuation
    ·         Cost Approach
    ·         Market Approach
    ·         Income approach
Ideally, all three approaches need to be looked at while deciding the value of patent. However, we give preference to income approach for valuing unique, income generating properties such as patents.

A cost approach is seldom useful for patents, and market approach may not be relevant because patent are unique by definition and comparable patents may be difficult to identify.

The most prominent approach to patent valuation is income approach which considers method like royalty based or profit contribution method which can factor in the cash flow stream generated by patent.

Check-list of documents needed to be taken care while assigning value to patent are -
    Ø  Check whether the patent is in force or not and patent maintenance fee is paid or not if not patent is worthless.
    Ø  Description of any litigation, past or present.
    Ø  Copies of any contract, licensing agreement or offer to license pertaining to patent.
    Ø  Available economic data on the industry in which invention is used.
    Ø  Useful life of patent.
    Ø  Inquire about patent validated.
    Ø  Details of any prior royalties paid for patent.
    Ø  Identify the next best alternative technology.
    Ø  The projected cash flow from patent.
(Source: This article is originally posted on Corporate Valuations Blog)
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