What makes a patent valuable?

Assessing the value of a patent is like assessing the value of a painting. You can use historical data and analyze certain characteristics pertaining to a patent and then argue those factors may be a positive or a negative factor in the patent's expected value. 

While the complexity of patents makes it impossible to establish definitive valuations, there are many factors that can determine a patents value. While a few of these factors are provided below, it is critically important to realize that if you attempt to establish an actual clear cut value of your patent you will quickly realize you will probably not receive the deal your patent deserves, but the deal that you can negotiate. Here are some patent negotiation points that may help you negotiate a higher value and a better deal for your patent.

Years of patent life remaining.

Most investors would not want a patent that has limited years of patent protection (e.g. one that is more than 16 years old). In the lawn & garden industry it takes too long to bring a product to market. The concern would be the ROI prior to the patents expiration. However, a new patent has the same cautionary look by an investor because your new patent is unlikely to have been in the market long enough to determine if it would be litigated. The average age of patents when they are litigated is three years old. A patent that has a successful litigation history is more valuable than a patent that has never been litigated.The test of time generates value but not too much time so, in general, patents that are most valuable are between 10 and 13 years old.

Number of inventors listed on a patent.

A higher number of inventors listed on a patent indicate that the patent is of higher quality than a patent that has a lower number of patent inventors listed. However, having numerous inventors listed on a patent can be a source of devaluation: if these inventors are partners in the patent then a buyer would be negotiating with all of them. All of the inventors must agree as to the same valuation for you to make a deal.

Anticipated revenue.

A standard procedure in patent valuation is determining the net present value of income that will be received as a result of owning or licensing the patent This is the most important and the most difficult points in establishing a patents value. If there is little or no income the patent is currently generating it becomes a guessing game. I have yet to meet a patent holder who did not believe their patent would generate at least $10 million dollars or more a year in revenue within two years if they had the right buyer. They may be right, they may even be low in their estimate, or they could be dead wrong. If you are buying or selling a patent you are best served if you have done your research to determine a real life income stream the patent will generate.

The following very specific factors that can be taken into account projecting revenues a patent will generate.

• Ability to trigger additional sales of established products. Patents are most valuable when they can be used to increase sales of products already on the market by making the current product better or increase sales by creating newer versions of the product.
• Ability to generate add-on sales. A patent may also generate revenue that can be forecasted when it creates important additional benefits associated with selling current products. An example would be a patent that prevents sprinkler heads from making a geyser when run over by a lawn mower may have an add-on sales value to an irrigation company that sells sprinkler heads. It would also give them a competitive advantage over companies that did not offer a similar product. In these instances, the patent seller should seek higher patent valuation from the buyer since the patent user will enjoy multiple benefits associated with the patent.
• Ability to generate sales in new markets. Patents typically see lower valuations from companies who will use the patent to sell products in a new market compared to the valuations they would see from companies who would use the patents to sell products in an existing market. The cost to enter a new marketplace is substantial today. All costs affect the probability of success including the cost of patents. Though new markets may offer the most potential and substantial sales this is usually only be achieved at great expense. I have seen great patents that could easily generate $5 million in sales within two years lay dormant because it would cost a company $10 million to enter the marketplace with the patent.
• Stage of development. Typically, the earlier in the commercialization of a patent, the lower the value. This is because there are significant risks in the patent never being brought to the market-and if the patent will ever result in a market-ready and salable product. In the scenarios in which the patent buyer or licensee would have to make most of the startup investment, the patents valuation would be less lucrative for the patent holder.
• Size of portfolio being sold. A Family of patents usually holds a higher value than a single patent. A single patent to protect an idea or device is usually easy to get around. A family of patents to protect an idea or product will receive the highest price because the idea or product is easier to defend when it's protected from multiple angles and attacks.
• Ability to defend. Last but not least, a patent does not protect you at all from anyone. A patent allows you to sue someone if you believe they have infringed on your idea or product. You financial and resource ability to defend your patent is as important as the patent itself. A patent has no value unless you are prepared to defend it.