How to Value Intangible Assets – Patents
Because patents are valuable assets to businesses, it’s critical for investors to understand how to value and account for them.
Innovation is the most crucial method for firms to stay competitive in the marketplace, and the only way to preserve that competitive advantage is to protect original ideas and prevent others from using them. Patents allow firms to protect their ideas from other users, at least for a limited time. Because patents are valuable assets to businesses, it’s critical for investors to understand how to value and account for them.
Patent valuation in business
The practice of calculating the real market worth of a patent or patent portfolio is known as patent valuation. Patent valuation is required when companies or inventors are discussing arrangements such as mergers, acquisitions, sales, or licensing of inventions. A patent is essential for intellectual property (IP) rights, intangible assets, and brands.
What is a patent?
A patent, in general, refers to an invention or technique that has been disclosed and registered with a governing body. In exchange for this information, the patent owner is granted an exclusive right to prevent others from utilizing or exploiting the invention in a given territory for a set number of years.
Why are patents important for a business?
A patent is necessary because it protects your invention. It has the power to protect any product, design, or method that meets certain criteria for originality, practicability, appropriateness, and utility. A patent can usually protect an invention for up to 20 years. This time period begins as soon as your patent is filed. The application process must be completed after you have published a description of your innovation, publicly disclosed the product, sold it or made your item available for commercial use.
Fortunately, the one-year requirement allows the inventor to evaluate their product before investing in a patent application. Take extreme caution. If you have a foreign product, patent protection is not accessible for an innovation that has been made public before a formal application has been filed.
Types of patents
There are different kinds of patents that are used for businesses having different notations, which are explained below:
- Utility patent – Anyone who invents or discovers a new and useful process, the machine, article of manufacture, composition of matter, or any new beneficial improvement thereof, may be issued a utility patent. Utility patent applications account for the vast majority of patent applications filed at the (United States Patent and Trademark Office) USPTO.
- Design Patent – The visual decorative elements embodied in or applied to a product of manufacture are referred to as design. The subject matter of a design patent application can relate to the configuration or shape of an object, the surface ornamentation applied to an article or a combination of configuration and surface ornamentation. A surface decoration design is inextricably linked to the article to which it is applied and cannot exist alone. It has to be a distinct pattern of surface ornamentation added to a manufactured item.
- Plant Patent – Anyone who invents or discovers and asexually reproduces any different and new type of plant may be issued a plant patent. An inventor (or the inventor’s heirs or assigns) who has invented or discovered and asexually reproduced a different and novel variety of plant, other than a tuber propagated plant or a plant found in an uncultivated state, is issued a plant patent by the United States government.
What are some important patent applications?
Patent applications act as an important tool used to value and know the worth of a certain kind of business allocation and how it can be differentiated from other businesses. These patent applications are further explained below:
- Provisional patents – A provisional application, according to US patent law, is a legal document submitted with the US Patent and Trademark Office that establishes an early filing date but does not mature into an issued patent until the applicant submits a standard non-provisional patent application within one year.
- Complete patents – In the first instance, as a complete patent application with a thorough specification completely detailing the invention and how it is to be implemented, as well as illustrative drawings (where relevant) and claims identifying the subject matter for which protection is claimed.
Laws associated with patents
The section of intellectual property law that deals with new innovations is known as patent law. Circuit boards, automobile engines, heating coils, and zippers are examples of actual scientific inventions that are protected by standard patents. Patents have, however, been used to protect a greater range of inventions over time, including coding systems, business processes, and genetically modified creatures.
Application: A set of paperwork must be submitted to the USPTO to receive a patent.
Agent: A person who is not a lawyer but is authorized to file patent applications on behalf of inventors but is not an attorney.
Claims: The section of the patent application defines the part of the invention that is new and nonobvious, as well as the part of the invention that can be protected later.
A patent application was filed with the USPTO for an innovation previously patented in another nation. The same person usually files both patent applications. Infringement is the act of producing or selling a patented device without first obtaining a license from the patent owner.
Prior Art: The state of the industry prior to the patent filing. Because they are not new, things that are considered previous art are not eligible for patent protection.
The process of applying for and getting a patent is known as patent prosecution.
The process of defending a patent against infringement is known as patent litigation.
Valuation of patents
An organization or a business has both tangible and intangible assets in the form of intellectual property such as patents. A company or organization invests in research and development operations to get a patent. The economic assessment of a company’s intellectual property aids in making judgments not just about the company’s assets, but also about commercialization and transactions. The licensing and assignment of intellectual property are the most important transaction decisions made in the market.
Understand patent valuation
It is critical for firms to account for the value of a patent in their books. In transactions involving mergers and acquisitions, business dissolution, bankruptcy, and infringement analysis, this value is very essential to firms. Obtaining the value of the innovation in question is an important component of valuing a patent. Obtaining a patent on an innovation that will not provide a suitable return for the investor is not a sensible business decision. Because patents are intangible assets, putting a monetary value on them.
When is a patent valuation required in a business?
A patent valuation has become extremely equivalent today in terms of business, and it helps to protect the brand from getting identical to the other brands. They are required when we do the following:
- M&A, joint venture, and bankruptcy – IP acquisition sometimes necessitates fewer resources than a traditional research and development cycle (time and money). Depending on the IP status and asset maturity, the possibility of the produced products or services becoming commercially viable increases in a merger or acquisition.
- When negotiating – Because patent acquisition is an expensive and time-consuming process, even before factoring in the R&D costs of designing a product or process, having a clear understanding of how you want to monetize your patent is critical. And in some circumstances, the earlier you begin the procedure, the better; in fact, it is recommended that you begin the process during the invention’s development stage.
- Patent conflict or dispute – Patent infringement lawsuits are not rare. The vast majority of patent disputes fall into one of two categories: those between market competitors and those brought by a third party in an attempt to monetize a patent portfolio. Licensing agreement disagreements are also rather prevalent. According to most experts, litigation should only be used as a last resort when it comes to resolving patent issues. Because litigation can cause significant business disruption and expense, it’s important to consider all options before going to court.
- Fundraising – Fundraising, often known as fund-raising, is the process of obtaining voluntary financial donations from individuals, businesses, charity institutions, and government agencies. Although fundraising is most commonly associated with efforts to raise funds for non-profit organizations, it can also apply to the identification and solicitation of investors or other funding sources for for-profit businesses.
- Patent protection – The patent owner has the sole right to prevent or stop others from profiting from the protected invention. In other words, patent protection prevents others from commercializing, using, distributing, importing, or selling the innovation without the patent owner’s permission.
- Accounting and taxation – A tax patent describes and claims a system or technique for decreasing or delaying taxes. Tax patents are most commonly issued in the United States, but they can also be granted in other nations. When a firm purchases a patent from its inventory or from another company, the patent or intangible asset account is debited, and the cash account is credited. The patent is amortized at the end of the term by debiting amortization expenditure and crediting accrued amortization.
How to value patents?
Traditionally, three techniques for patent valuation have been used: the market approach, income approach, and cost approach. The current value of cash flow or cost savings that a patent will bring will be the value of a patent under the income approach.
Patent valuation methods
Patent valuation is an approach to calculating the real market value of the patent so that the patent owners can generate money from their intellectual property rights. Here are the patent valuation methods:
- Cost-based method – According to this method, the value of a patent is the replacement cost, or the money required to replace the invention’s protection right. The replacement cost of an item is the amount of money that would be paid to replace it at the current moment. If an inventor has a patented item, the patent’s worth is equal to the amount of money required to replace the invention.
- Market-based method – This strategy entails figuring out how much a prospective buyer would pay for a similar property. In other words, the patent’s value is roughly comparable to the value of identical patents or patented products that have already been sold and purchased.
- Income-based method – When determining valuation, this method considers future cash flows. It asserts that the present value of the increased cash flows or cost savings that a patent will assist generate is the worth of the invention. When a corporation or individual develops a product with the potential to be patented, the goal is that the patented product would enhance sales or, at the very least, save money for the company.
- Option-based method – The key similarity is that a patent gives its owner the right to prevent others from using the underlying invention, so patents and stock options both represent the ability to utilize an asset in the future while preventing others from doing so.
Why are claims required while performing patent valuation?
The boundaries of an invention are defined by a patent claim, which establishes what the patent does and does not cover. A patent claim is the most significant part of a patent application since it defines the protected subject matter. The claims in a patent or patent application define the extent, or scope, of the protection provided by a patent or sought in a patent application in technical terms. In other words, the claims’ objective is to specify which subject matter is covered by the patent (or sought to be protected by the patent application). A patent claim’s “notice function” is to notify others of what they must not do if they violate the claim.
How can Eqvista help with business patent valuation?
Patents allow numerous parties to enter into an agreement to use each other’s patented technology in exchange for the right to use their own patented technology. A large corporation that wishes to strengthen its patent position relative to another large company may be particularly interested in owning a strategic patent portfolio (containing issued patents with a strong protection on the start-valued up’s products or services). Eqvista has a team of experts who can assist you with the business patent valuation. Fill up the sign-up form and get a free consultation.