The buyer is trying to value our tech-enabled service business using the Cost Approach because we have minimal physical real estate. How do we use Gross Substantial Value and the Income Approach under IVS 105 to prove our proprietary workflows and systems deserve an earnings-based valuation?

Question

Tyler Smith · Accepted Answer

Using the Cost Approach to value a tech-enabled service business is an attempt by the buyer to ignore your intangible value and buy you for pennies on the dollar. They will argue that because you do not have heavy machinery or real estate, your business has low asset backing. You must reject this framing by using Gross Substantial Value and the Income Approach under IVS 105.

First, explain that the Cost Approach is completely inappropriate for a business whose primary value driver is intellectual property and systemized workflow automation. Under IVS 105, a valuation method must align with how market participants actually price similar assets. In your industry, buyers buy cash flow, not physical desks.

Next, calculate your Gross Substantial Value by revaluing your proprietary software, documented processes, and trained workforce to their current market values. Quantify what it would cost a competitor to build your operational platform from scratch, recruit and train your team, and establish your market presence.

Then, pivot the negotiation to the Income Approach. Use your historical financial data and future projections to show how your automated workflows generate high-margin cash flow. Demonstrate that your systems allow you to scale revenues faster than operating expenses, which is the definition of operational leverage. By proving that your intangible systems are the direct engine of your profits, you force the buyer to value you on a multiple of earnings rather than a sum of physical parts.