Best way to evaluate patent value?

November 15, 2022

by a searcher from Miami University of Ohio in Indianapolis, IN, USA

I've found a company that's got patented technology and they're wanting a large multiple to exit, based purely off of what they think the patents are worth. Does anyone know how to evaluate the value of a patent? Is the best option to hire a firm?

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Reply by an intermediary
from University of California, San Diego in San Diego County, CA, USA

The financial modeling approaches above take into account the current cash flow generated by commercializing the technology itself.... (Perhaps in the form of a license of the patented technology... but it could be in other forms as well). I'm not a patent expert, but this is an additional consideration: if you're trying to estimate what the market value of the patent is, you have to take into account how enforceable it is... (Is the patent entrenched with other patents owned by the company to ensure that it's not easy for the competition to make a slight variation and still make a very similar technology without paying you a dime? And does the company have the funds (and would they have a sufficient case) to win a legal battle if needing to defend it?) Then finally, how easy would it to be to make a competing technology that accomplishes the same goals a different way? (Is this alternative technology cheaper? Better in some ways?) Generally, if you're not extremely experienced in leveraging patents, I'd be cautious about counting on them to provide any value on their own... You might limit the value to "lower risk of being sued for continuing to commercialize the technology" rather than thinking of doing anything else with it. (So you could probably save some time (and money) by just ignoring the intrinsic value of the patent itself and just focus on the current and prospective business performance... if you were able to actually sell the business for more because of this patent or later attract an investor because of it, perhaps that's icing on the cake... I'd venture it's pretty difficult to predict that at this point). Note: it seems like the current owners may be overvaluing the patent... so perhaps asking these kinds of questions will help draw into question their certainty as well. Hope that helps!

Reply by a searcher
from Georgetown University in São Paulo, State of São Paulo, Brazil

Hi Michael, I am not an expert on patents, but two ways you can think of this value of the patent are (1) the marginal value (i.e. discounted free cash flow) it creates for the firm and (2) your/the company's next-best alternatives. For (1) does the firm have competitors with similar technologies/patents? can other firms compete in the company's space even without a patent? is there obsolescence risk? how would you value those firms relative to how you would value the firm you found/how do the margins compare? For (2) ultimately the patent is only worth what it can generate in terms of returns once you own the company, so if the multiple they are asking does not get you to a return you are comfortable with (i.e. a very high one), then the patent should not be worth to you the multiple they are asking (i.e. your alternative of not investing or buying another company is better), and for the company itself whether there is another potential buyer willing to pay that multiple/whether they are actually motivated to sell. Hope this is helpful, would be interested to hear from others.

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