We have developed proprietary AI algorithms that automate our customer onboarding, but the buyer's Quality of Earnings team is treating this as a simple internal software tool with zero balance sheet value. How do we use the Income Approach under IVS 105 to calculate the capital value of this IP based on future cost savings?

Question

Tyler Smith · Accepted Answer

Buyers want to buy software-level efficiency while paying professional services multiples. When they dismiss your proprietary AI onboarding tool as an internal utility, they are trying to capture your operational leverage for free. You must use the Income Approach under IVS 105 to force them to pay for this asset.

Specifically, apply the Relief from Royalty method or the Cost Savings method under IVS 105. To use the Cost Savings method, calculate the exact labor costs, processing time, and error rates you avoided by using the AI tool compared to the traditional, human-intensive onboarding process. If the AI system saves you fifty thousand dollars per month in administrative wages while scaling capacity, that represents six hundred thousand dollars in annual cost savings.

Capitalize this recurring savings stream by applying an appropriate discount rate that reflects the technology's lifecycle. This converts a seemingly minor internal tool into a multi-million-dollar intangible asset on your valuation model. Present this data clearly to the buyer's Quality of Earnings auditors. Show them how this software-driven leverage directly inflates your overall EBITDA margins. By framing the AI tool as a proprietary income-generating asset rather than a simple cost center, you establish a defensible capital value that must be added directly to your enterprise valuation.