The buyer is using the Cost Approach under IVS 105 to value our custom-built AI operating system, but we know this platform reduces our SG&A by forty percent. How do we force an Income Approach valuation that reflects this ongoing operational leverage?

Question

Tyler Smith · Accepted Answer

The Cost Approach under IVS 105 only measures what it would cost to rebuild your technology. It completely ignores the economic value that your platform creates. If your custom AI operating system reduces your SG&A by forty percent, valuing it based on developer hours is a massive concession. You must demand the Income Approach.

To force this shift, you must quantify the cash-flow impact of your operational leverage. Build a financial model that compares your current, high-margin performance against a standard industry benchmark. Show the buyer the exact cash savings generated by your automated client onboarding and delivery systems. This difference represents the excess earnings generated by your technology.

Under the Income Approach, specifically the capitalized excess earnings method, you can capitalize these savings to calculate a discrete valuation for your proprietary platform. Present this analysis alongside your V/TO to show how this efficiency scales as revenue grows.

Use your weekly Level 10 Meeting to align your financial team on these calculations. If the buy-side team resists, refer them to objective valuation data. Frame the technology not as a software asset, but as a permanent cost-reduction engine. Showing that your system directly boosts EBITDA margins is the most effective way to reject the Cost Approach and defend your premium multiple.