Our business has built proprietary software that runs our service delivery, but the buyer's appraiser is insisting on using the Cost Approach to value this software. How do we force them to use the Income Approach under IVS 105?

Question

Tyler Smith · Accepted Answer

Buyers often try to use the Cost Approach to value proprietary software, arguing that it is only worth what it cost you to build. This is a trap that ignores the operational leverage and future cash flows your technology generates.

Under IVS 105, you must force the buyer to use the Income Approach. The value of your proprietary software lies in its ability to automate your service delivery, lower your operating costs, and scale your business without a linear increase in headcount.

To prove this, isolate the cash flows generated by your automated workflows. Show the buyer how your software reduces delivery times, eliminates manual errors, and increases customer retention. Compare your margins to industry competitors who rely on manual labor.

By proving that your software directly drives higher margins and faster cash generation, you justify a valuation based on discounted future cash flows rather than historical development costs. This shift in valuation methodology is the difference between a low asset-based valuation and a premium enterprise multiple.