Case Study: Tier 1 Patent Valuation
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Background
We were contacted by a small company within the retail e-commerce industry to provide a Tier 1 financial valuation of their patent.
The client’s patent portfolio consisted of one U.S. issued patent, covering a novel distribution method within the e-commerce space. At the time of valuation, an international patent in Australia remained active.
Our services were recruited to determine an accurate and objective value associated with the client’s patent which they could later use for monetization (licensing or sale).
Valuation
There are three approaches that can be used when performing a financial valuation: the Cost Approach, Market Approach, and Income Approach.
The Cost Approach considers two aspects: the replacement cost for the patent, and the cost to develop an equivalent patent. This approach generates a value of the patent through aggregating the R&D costs, fees for drafting, filing, and maintenance of the patent, and fees from consulting with a patent attorney or agent. In this case, we refrained from using this approach because patents are, by nature, unique which provides difficulty in determining an exact value.
The Market Approach generates a value for a patent based on actual transactions for similar patents. We determined this approach to be inappropriate in this valuation because distribution methods among retailers are often proprietary and thus, cannot be properly valued.
The Income Approach, also known as Discounted Cash Flow (DCF), measures the value of a patent as predicted income and cash flows by projecting future economic benefits gained from licensing of the patent and discounting to net present (year “0”) values.
In conformity with our client’s goals of monetizing their patent, we determined the best method of valuing this patent to be an Income Approach known as the Relief-From-Royalty Payment Method which measures a property’s value obtained from potential royalty payments by calculating the amount of income that can be generated by licensing an intangible asset and applying royalty rates from Comparable Uncontrolled Transactions (“CUTs” or “comparables”).
We determined a Total Available Market (“TAM”) for retail e-commerce services in the U.S. in the period between 2022 through 2034. Additionally, a Compound Annual Growth Rate (“CAGR”) for the global e-commerce market was found for the period of 2020 to 2027, which we applied to obtain market projections for years beyond 2027. We made no additional predictions on the growth of retail e-commerce services beyond 2027 and assumed that the market will remain steady across the relevant time period.
Next, we determined an appropriate royalty rate based on fees provided by an e-commerce service to potential retailers who wish to use their distribution services and then applied a relevant industry licensing royalty rate to those fees to obtain a rough final royalty rate.
Using the acquired royalty rate, we calculated the nominal value of the expected royalty earnings from various e-commerce services based on their market share.
Results
By performing thorough market research in tandem with technical evaluations from our subject matter experts, we were able to quickly deliver an unbiased patent valuation to the client.
About GHB Intellect
Whether a client is seeking to value, develop, sell, license, or assert a patent portfolio, GHB Intellect has the right resources to enable business objectives to be met. Our experts comprise active industry leaders who are up-to-date and proficient in the state-of-the-art technologies and practices in order to provide the most useful and actionable consultations to firms and individuals. Our work is highly respected by our clients and their associates for being accurate and thorough. Please contact us to learn more about our IP monetization capabilities, including litigation support.