20 Steps for Pricing a Patent: To Value an Invention You Have to Understand It

By Cromley, J. Timothy | Journal of Accountancy, November 2004 | Go to article overview

20 Steps for Pricing a Patent: To Value an Invention You Have to Understand It


Cromley, J. Timothy, Journal of Accountancy


Inventors help solve vexing problems, both sophisticated and simple, and as a result sometimes enjoy considerable celebrity and rewards. Our society's economic success, too, is based on innovation. To encourage public disclosure of inventions, the U.S. Patent and Trademark Office (USPTO) issues an inventor a patent, which excludes others from making, using, selling or importing that invention into U.S. territories for a limited period of time. The three kinds of U.S. patents cover living plants, ornamental designs and useful inventions (the latter are called "utility" patents). Familiar products once protected by U.S. utility patents include Alexander Graham Bell's "improvement in telegraphy" (the telephone), the Wright brothers' "flying machine" and Thomas Edison's "incandescent lamp" (the light bulb). This article provides valuators such as CPA/ ABVs with a set of basic procedures for valuing U.S. utility patents.

Patents are intellectual property (IP) that may need to be appraised for accounting, tax, litigation and transactional purposes in situations that include divorce or bankruptcy actions, estate settlements, sales of businesses and company mergers (which might require valuing portfolios of inventions). The ability to appraise patents can be important for GAAP financial reporting purposes under FASB nos. 141 and 142, especially for auditors and valuators in high-tech industries in which there are lots of business combinations. An understanding of how to appraise patents also may be useful in expert witness engagements (see "Damages Aren't Always Patently Obvious," page 36).

RESEARCH AND COMPARE

Some patents are very valuable, while many are not. Because patents often are quite complex, appraising one usually is a highly detailed and expensive process that requires the input of lawyers and advisers with specific technical knowledge and experience. The makeup of valuation teams will vary by engagement, but it is axiomatic that before an appraiser can value something, he or she has to understand what it is. Here are 20 steps to help valuators such as CPA/ABVs do that:

1. Check whether the patent is in force. Before the CPA/ABV starts a detailed evaluation, he or she should see whether one is warranted. The first question to ask is whether the patent's maintenance fees are up to date. If not, the patent may be worthless. Maintenance fees are due at the U.S. Patent and Trademark Office at 3 1/2, 7 1/2 and 1 1/2 years from issuance. Some payment delays can be rectified, but if the maintenance fees haven't been paid by the "cure" date, the patent might be worth nothing due to "abandonment."

2. Identify the context. The premise of any valuation engagement can affect its conclusion. For example, a patent royalty amount that seems reasonable in an arm's-length negotiation may not be indicative of what later might be assessed for infringement of the invention if a plaintiff successfully sues for damages.

3. Gather information. For particularly valuable patents, CPA/ABVs should request the following:

* A copy of the application file on the patent, including all USPTO correspondence.

* A list of any foreign patent applications relating to the invention (and related sales).

* Copies of any relevant business plan, marketing study, financial statements and independent appraisal.

* Descriptions of any litigation, past or present.

* Copies of any contract, licensing agreement or offer to license pertaining to the patent.

* Available economic data on the industry in which the invention is used.

* Copies of promotions and advertising materials used during the past year relating to the invention or the product in which it is incorporated.

* Cost information relating to the existing or proposed patented product including cost accounting records and/or engineering feasibility studies.

4. Assemble a valuation team. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

20 Steps for Pricing a Patent: To Value an Invention You Have to Understand It
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.