A Patent Is Like a Product Created by Law

If you make an invention, you can get a patent.

An invention is just a vague idea at first.
But when you follow the steps set by patent law, it can become a patent — a kind of valuable asset.
Once it becomes a patent, you can make deals with other people, so a patent is like a product.
Patent law is the system that turns your invention into a product called a patent.

A patent attorney handles this process for you.
That’s why their job has a creative side — they help turn ideas into patents.
 

A patent is like a product, so it can be bought and sold freely.
You can use your patent in your own company, or you can sell it or license it to other companies to make money.
You can also use a patent as collateral to get a loan from a bank or other financial institution.
This is called IP-backed financing (using intellectual property as a loan guarantee).

Having a patent gives you more business options.

Patents Can Be Hard to Deal With

That said, in reality, patents are not bought and sold very often.
One reason is that there isn’t a well-developed market for trading patents.

One reason the market for trading patents isn’t well developed is that it’s hard to figure out how much a patent is worth.
The value of a patent depends on many different factors, so it’s difficult to set a price that everyone can agree on.

Because of this, even though a patent can be treated like a product, it’s hard for companies to include it clearly in their financial statements.
In the end, a patent is a kind of product that’s hard to understand unless you're an expert.
For most people, it's not an easy asset to recognize or evaluate.

One more reason why patents are not bought and sold often is that there aren’t many people who can truly judge the value of a patent.

How to Evaluate the Price of a Patent

To do that, they need a way to measure the value — in other words, a clear method for evaluating patents.

There are two main types of patent evaluation: qualitative and quantitative.

Qualitative evaluation means looking at what the patent is about and how good the technology is.
It asks questions like, “How interesting or useful is this technology?” and “How strong is this patent?”

Quantitative evaluation means calculating the price of a patent.

By using these types of evaluation, we can understand how valuable a patent is.
This helps us make better decisions for investment, trading, and strategic use.

There is no single, definitive way to apply either evaluation method.

For quantitative evaluation, there are several standard methods.
The most common ones are the cost approach, market approach, and income approach.

Many other methods have been suggested, but these three are the main ones.
 

Cost Approach

The cost approach is a method for valuing a patent based on how much it would cost to either obtain the patent or develop the technology behind it.

The cost approach includes two main methods:
One is the historical cost method, which looks at how much was actually spent in the past to obtain the patent.
The other is the replacement cost method, which estimates how much it would cost to develop the same technology today, as if starting from scratch.

In Japan, it’s estimated that about 76 million yen (just over 500,000 US dollars) is spent on research and development to produce a single patent application (See: “Lifetime Average Number of Inventions by Japanese”).
Sometimes, evaluations only consider intellectual property costs and leave out R&D expenses.
In that case, the estimated value of the patent becomes much lower.

The cost approach has several advantages.
It can be used to evaluate patents that haven’t been used yet.
It refers to actual costs that were spent, so it’s objective and easy to understand.
Also, it fits well with current accounting systems.

On the other hand, some people criticize the cost approach.
They say it’s not always reasonable to assume something has value just because money was spent on it.
The value can also change depending on what is counted as a “cost.”
In addition, this method doesn’t consider the unique value or special features of a patent.

Market Approach

The market approach is a method for valuing a patent by looking at real-life examples of similar patents that have been bought or sold.
In short, it’s a simple method where you check how much similar patents have been traded for, and use that as a basis for the value.

One advantage of the market approach is that it uses real market prices as a reference, so people are more likely to feel that the estimated value makes sense.

On the other hand, there are some criticisms of the market approach.
Since patents are not traded very often, it’s hard to find good examples of similar deals.
Even when similar cases exist, the details of those transactions are usually not made public.
Also, some people say it doesn’t make sense to assume that “similar examples” exist in the first place — because patents are usually granted for unique technologies.

Income Approach

The income approach is currently the most commonly used method.

The income approach is a method for valuing a patent based on how much income the patent or technology can generate when used in a business.

The income approach includes several methods.
One is the relief-from-royalty method, which estimates the value of a patent based on the royalties (license fees) a company would have to pay if it didn’t own the patent.
Another is the discounted cash flow (DCF) method, which calculates the patent’s value based on the extra income it is expected to generate in the future by owning the patent.

The income approach is considered better than the cost and market approaches when it comes to measuring a patent’s ability to generate income — in other words, its unique value.
In particular, the DCF (Discounted Cash Flow) method has an advantage because it applies a standard idea from the financial world to patents, making it easier for people in finance to understand and work with.

On the other hand, the income approach relies on assumed numbers like royalty rates, future income estimates, and discount rates.
Because of this, the final value can end up being quite subjective.
Other problems include the fact that it’s not well suited for unused patents, it’s hard to evaluate groundbreaking patents that open up new markets, and the value can become unrealistic depending on the size of the company using the patent.

Positive Value and Defensive Value

A patent can have two kinds of value: positive value and defensive value.

Positive value is the value based on the expectation that the patent can help generate income.
It comes from actively using the patent to create business opportunities or profits.

Defensive value is the value that comes from owning a patent and being able to limit or control what other companies can do.
It’s the power to influence others through patent ownership.
For example, even patents that are shared openly and used for free by others can have strategic value.

When we also consider defensive value, evaluating a patent becomes even more difficult.
This is because a patent doesn’t always make money directly.
Instead, it can bring indirect benefits — like keeping competitors out of the market or limiting what other companies can develop.
These kinds of value are often overlooked in standard evaluation methods.
 

Confidence in the Deal Price

When a patent is traded, a deal price is set.

For example, let’s say Company A sells a patent (Patent P) to Company B for 30 million yen (about 200,000 US dollars).
Company A records 30 million yen (about 200,000 USD) as income, and Company B records the same amount as an expense.
In this case, Company B will list "Patent P worth 30 million yen (about 200,000 USD)" as an asset on its financial statement.

If both sides agree, there’s no problem.
But whether 30 million yen (about 200,000 USD) is actually a fair price from an objective point of view is a different question.

Sometimes, the seller wants to know how much they should set as the sale price for a patent.
Or, even if the seller hopes to sell their patent for around 30 million yen (about 200,000 USD), they may want a solid reason to support that price — something they can explain to the buyer with confidence.
The same goes for the buyer as well.

In situations like this, different valuation methods are used to calculate the value of the patent and help both sides agree on a fair deal.
If both the seller and the buyer can offer prices with clear reasoning behind them, it makes the negotiation much easier.

In the United States, there is a company that facilitates the buying and selling of patents through auctions.
One advantage of auctions is that prices are set by the market naturally, so both the seller and the buyer are more likely to feel that the price is fair.
However, buyers still want to have an idea of how much they should be willing to pay.
That means the need to know the patent’s value — with solid reasoning — still remains.

Value Depends on Who Uses It

To make things even more complicated, the value of a patent can change depending on who uses it — whether it’s an individual or a company.

If a certain technology is useful for a particular industry or company, its value will be rated highly.
But if that same technology isn’t needed in another industry, its value may be much lower.
For example, a semiconductor patent that is highly valuable in the semiconductor industry might be extremely important to a chip manufacturer, but it could be completely irrelevant to a steel company.

This isn’t just true for patents — value depends on the person or company looking at it.

Van Gogh’s paintings are expensive because many people believe they are valuable.
Because of this, even people who don’t personally like his work can still feel comfortable buying it.
They feel confident that a Van Gogh painting will always sell — there will always be someone who wants it.
Like Van Gogh’s art, things that are widely recognized as valuable by many people are easier to trade in the market.

There are two sides to value: the value something has to you, and the value it has to others.
For example, if you want something but no one else does, you can probably get it for a low price.
On the other hand, even if you're not interested in something, if lots of other people want it, the price will usually be high.

When lots of people want something or think it’s valuable, it becomes easier to sell in the market.

If you’re good at judging the value of patents, you can spot patents that may be in high demand, even if you don’t need them yourself.
You could buy those patents at a low price and sell them later at a higher price to make a profit.

If patent trading becomes more common, the idea of patents as marketable products will start to get more attention.