Different methods used in patent valuation are based on different premises and take different types of factors and sources of uncertainty into consideration. Typically, the traditional valuation methods for patents are divided to costbased, marketbased, and income based techniques. The simplest methods equate the value of patent protection with the historical R&D costs of the invention or market value of comparable, previously traded intellectual property assets. 

More complex valuation frameworks allow for taking into account some of the decisions and the managerial flexibility related to patent prosecution, ownership and commercialisation of patented inventions as well as the risks and uncertainty related to these decisions. Some aggregated econometric models on patent valuation also exist.

 1- COST BASED METHOD

 This method assumes a direct impact of costs on the IPR value. It is based on the analysis of costs necessary to replace the IPR concerned, as well as on costs that have been invested for the development, application, maintenance and commercialisation of IPR, and on a consideration of costs which may have been avoided by establishing IPR such as royalties for licensing-in a related technology. The disadvantage of this method is that, not considering IPR market indicators, it does not allow to establish a fair relationship between IPR costs and related IPR real market value.

2- THE MARKET BASED METHOD

It is devoted to assets IPR market value by reference to comparable market transactions. The method basically consists of assessing prices and/or profits achieved by third parties in comparable market transactions, such as mergers and acquisitions as far as the IPR assets are concerned, IPR sales or the grant of IPR-related licences. An itemisation of such model is the relief-from royalty method that takes into account only previous licensing royalties prices determining the value of related IPR. Such methods imply serious problems mostly when comparable transactions cannot be found with regard to the relevant IPR.

3- THE INCOME BASED METHOD

 Such method is the most comprehensive one as it aims at determining the IPR potential for market revenue growth, the profit to be expected by the future commercialisation of the IPR concerned. This method analyses the nature of the asset, its legal status, its related marketability as well as market conditions, likely performance and potential, and the time value of money. It is illustrative, demonstrating (or not) the cash flow potential of the property and is highly regarded and widely accepted in the financial community.

4- SPECIFIC METHODOLOGIES

 A) 25 % RULE

 According to “the 25% rule”, the royalty rate is generally expected to fall within the range 25% to 33% of profits before interest and tax (PBIT). However, this “rule” only applies where:

the IP is a driver of sales/profits; ,the IP represents a relatively strong arsenal of assets; ,the IP grants the user protection from competition; and the IP appears to be valid and enforceable.

B) INDUSTRY STANDARDS  

Those who are a little uncomfortable with the unsophisticated 25 percent rule, use the Industry Standards method. So instead of using a blanked 25% figure, it seeks to use the Standard prevailing in an industry to determine the percentage share of the licensor. It is again just a method of arrive at the apportionment between licensor and licensee. Industry Standards method is usually used along with Ranking. Comparable intellectual property is ranked on a subjective basis using scoring criteria to determine a more precise royalty rate within an industry royalty rate range36.  

C) RATING & RANKING   

Rating & ranking compares IP assets on a subjective or objective scale. It is often used in conjunction with Industry Standards method.

Five components; 

(a) scoring criteria; (b) scoring system;(c) scoring scale; (d) weighting factors; and (e) decision table

Conducted preliminary market research to identify most appropriate target companies, and contact companies to gauge, and stimulate, interest.

D)MONTE CARLO ANALYSIS   

This method is the refinement of Income method and it is assigns a range of values to variables used in calculating Net Present Value such as:

Price variables: price premium, additional unit sales

Cost variables: COGS, SG&A

Monte Carlo Analysis is assigns a probability to individual values within a range. 

Probability distributions: uniform, triangular, normal, log-normal

Calculation of Net Present Value is repeated 500-1,000 times based upon random selection of probability.

Accuracy of Net Present Value values is no better than accuracy of value ranges and probabilities assigned to individual values.   

E) REAL OPTIONS METHOD    

Real option analysis offers interesting insights on the value of assets and on the profitability of investments, which has made real options a growing field of academic research and practical application. Real option valuation is, however, often found to be difficult to understand and to implement due to the quite complex mathematics involved. Recent advances in modeling and analysis methods have made real option valuation easier to understand and to implement. 

Real options are commonly valued with the same methods that have been used to value financial options. Most of the methods are complex and demand a good understanding of the underlying mathematics, issues that make their use difficult in practice.