Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions. Valuation of patent rights is one of the main activities related to intellectual property management within an organization or company. Indeed, knowing the economic value and importance of the intellectual property rights assists in the strategic decisions to be taken on the company’s assets, but also facilitates the commercialization and transactions concerning intellectual property rights.
There are several business situations where valuation is required:
Valuation of a company for the purposes of a merger, acquisition, joint venture or bankruptcy: Most of the technological companies are highly based on intangible assets and investment in knowledge, research and innovation. According to studies, expenditures on knowledge, through investments in R&D or software, have grown at a higher rate than expenditures in tangible assets. This change in investments has consequently been reflected by a heavy importance of intangible assets and patents in companies. Therefore, to know the value of companies it is essential to know the value of their intellectual property.
Negotiations to sell or license intellectual property rights: As in other business transactions, organizations negotiating agreements to sell or license intellectual property and patent rights commonly have to agree on a price. Knowing the value of the intellectual property rights is essential to reach such an agreement, but also to make sure the parties are engaging in a good deal.
Support in situations of patent conflict or dispute: In scenarios of patent conflict, such as patent infringement proceedings or alternative dispute resolution mechanisms, quantification of damages is often a necessary step of the process. The correct valuation of the intellectual property right at stake is therefore essential to guarantee a fair recovery of the damages.
Fund raising through bank loans or venture capital: Valuation of the intellectual property to be used as security for bank loans or to attract venture capital and investors is essential. Several studies reveal that, in particular, owning patents and a proper intellectual property management play a crucial role in the decision of venture capitalists.
Assisting internal decision making for patent protection strategies: Valuation also plays a role on decisions concerning the patenting strategies and country selection for registration of intellectual property rights, or can assist organizations to identify weaknesses such as ownership uncertainties that have an impact in the value of the intellectual property rights and on decisions for the exploitation of such assets.
For accounting and taxation purposes: Organizations are required to report on their assets, including their intangible assets. Valuation is therefore a necessary step, as well as in situations of tax planning involving intellectual property. Defining the objectives and context of the valuation is essential, since it determines the strategy as well as the type of valuation method that should be used. This is therefore the first step to take when performing a valuation.
Patent valuation methods: Different approaches of patent valuation are used by companies and organizations. Generally, these approaches are divided in two categories: the quantitative and qualitative valuation. While the quantitative approach relies on numerical and measurable data with the purpose to calculate the economic value of the intellectual property, the qualitative approach is focused on the analysis of the characteristics and potential uses of the intellectual property, such as the legal, technological, marketing or strategic aspects of the patented technologies. Qualitative valuation deals also with assessing the risks and opportunities associated to the intellectual property of the company Several methodologies are used on the quantitative approach, but generally they can be grouped in four methods: – Cost-based method – Market-based method – Income-based method – Options-based method Source: Wikipedia