We have built a proprietary database of historical market transactions that drives our customer recommendations, but the buyer is valuing us on a basic Cost Approach. How do we use the IVS 105 Income Approach to force a valuation based on our future cash flow premium?

Question

Tyler Smith · Accepted Answer

When a buyer tries to value your proprietary data or custom-built technology using a Cost Approach under IVS 105, they are looking at what it cost to build, not what it is worth. This is a massive undervaluation tactic. You must force the buyer to use the Income Approach, specifically the relief-from-royalty method or the multi-period excess earnings method, to capture the true value of your operational leverage.

To build a defensible Income Approach model, document exactly how your proprietary database drives your customer retention and lowers your customer acquisition costs. Show how this asset allows you to scale your operations without a linear increase in overhead. Translate this operational efficiency into future cash flows.

Under the IVS 105 standards, you have the right to demand the valuation method that best reflects the nature of the asset. Since your proprietary database is a direct driver of future cash generation, the Income Approach is the only appropriate methodology.

Provide the buyer with clean, historical data proving that your database increases your margin by a specific percentage. This forces their analytical teams to accept a forward-looking valuation that recognizes the true premium of your intellectual property.