The buyer is discounting our intellectual property because we do not hold active patents on our proprietary workflow systems. How do we use the IVS 105 Income Approach, specifically the Relief from Royalty method, to establish a distinct valuation for our proprietary software?

Question

Tyler Smith · Accepted Answer

Buyers often use the absence of formal patents as an excuse to ignore the value of your proprietary internal systems. They want to buy your cash flows but pay you only for your physical assets. To stop this, you must apply the Relief from Royalty method under the IVS 105 Income Approach.

This method calculates the value of your proprietary workflow systems by estimating the royalty payments you would have to pay to license similar technology from a third party if you did not own it. By retaining this IP, your business avoids this ongoing operating cost, which directly increases your cash flow and operating margins.

To build this valuation, work with an independent appraiser to identify market-rate royalty benchmarks for comparable workflow software in your industry. Apply this royalty percentage to your historical and projected revenues to determine the annual cost savings.

Once you discount these annual savings back to present value using an appropriate risk-adjusted discount rate, you have a defensible, quantified asset value. This proves to the buyer that your proprietary systems are not just nice-to-have operational tools, but distinct, high-value assets that generate a permanent margin premium. Presenting this formal valuation forces the buyer to move past their arbitrary discount and pay for the technology driving your business.