Apart from the added value that an Intellectual Property Right (IP) offers for your business, an IP right (such as a patent, a trademark or design) also has a certain economic value. But how do you determine that value?
There are many ways that can be applied to determine the value of a patent (or other IP right). Some of the main approaches are:
- 1. Cost approach;
- 2. Income approach; and
- 3. Market approach
- 4. Cost approach
The cost approach looks at all expenses that have been incurred to apply for (and possibly maintain) the intellectual property right. The development costs that have been incurred are also taken into account. This approach is particularly suitable at an early stage of product development.
Suppose you have made an invention as a company (or small inventor) and also applied for a patent. But, you can't actually get the invention to the point where it can be brought to market. Based on the cost approach, you could sell the patent to an interested party who is able to market the idea. In this way, the company can recoup its investment (with return).
The income approach looks at future income that can be specifically attributed to the intellectual property right.
Suppose a company has developed a new product. A patent has already been granted. Competitors can bypass this patent, but this clearly makes the products of that competitor less advantageous. So the patent is strong. There has been market research, and customers are very interested in this product. As a result of the patent, thecompany expects a doubling of its market share for this type of product. Based on a number of further factors and assumptions, the company can now calculate its projected revenue from the product. It is also possible to calculate the expected income without a patent. This means that the added value of this patent, and therefore the value of the patent itself, can be calculated.
The market approach looks at data from comparable transactions in order to arrive at a valuation of the relevant intellectual property.
This approach works especially well for large companies with a large collection of intellectual property rights. For example, on July 5, it was announced that Nokia has entered into a major deal with the Chinese company Xiaomi. This would mainly concern the sale licensing of patents. The deal amount? Unknown. But for a similar deal, Samsung (in 2014) paid about $1 billion a year in licenses to Microsoft. Based on the market approach, the Nokia-Xiaomi deal could therefore be of similar size.
Value is subjective
Value is, of course, a subjective concept. This certainly applies to “intangible” things such as IP rights. Nevertheless, the value of such a right can be substantiated with the above approaches. This is especially important if a patent or trademark is being sold or licensed. Then it must be clear to both parties how the value was determined.