Getting the value of intangible assets can be quite challenging. One such intangible asset is software, which many tech startups and developers have a hard time putting a price on their work. These developers and companies often receive offers to have them sell their software. In this situation, it is important to get a software valuation. A valuation is not just a tool to determine the proper selling price for your software, but it can help in attracting investors since you can show them how much your product is worth.
Software is an intellectual property, as well as an intangible asset, and it is essential that a company’s assets are valued. A software’s value can be estimated through a valuation. This is usually done as part of the purchase and sale of business assets, and it is useful for companies to develop their strategies for further growth.
Why is software valuation required?
A software valuation is needed when there is a purchase or sale of the software. Many software developers and companies are often approached with offers to sell their product at a price that might not benefit them. This is why getting a valuation for a software is important as it sets the middle ground between developers and buyers for negotiating the price.
What are some important metrics used in valuing software?
The value drivers of the program must be assessed as part of the valuation process. The following are some of the most important market value determinants:
- Technology – When conducting a software valuation, some areas of technology may be covered. These areas can include the innovation level of the software, the software’s usefulness and language whether it’s up-to-date, and the ease of modifying and updating the software.
- Functionality – Checking the ease of use of the software is included in this value driver. It checks for whether the technology is maintainable, can be applied to a variety of platforms, as well as its efficiency. It also checks for the software’s compatibility with the most recent version of other software.
- Documentation – Documentation seeks to answer whether or not there is enough user support, developer manuals or help utility from the software. As documentation is the main source of information in using a software, the valuation will look at its extent for both users and programmers.
- Adaptability – To look into a software’s adaptability, it’s important to see whether the software can be scaled to handle large business structures and make running a business more efficient and effective. The software must also be able to work together with other software applications. If the software is not adaptable, it can affect the valuation and may give a lower value.
Common Software Valuation Methods
When conducting valuations for software, there are three common methods used: asset approach, income approach, and market approach. These valuation methods are used by valuation analysts to determine the value of a software. Aside from these valuation methods, several value drivers are also assessed in the valuation: technology, functionality, adaptability and documentation.
The asset approach bases value on the projected cost of replacing the program with one that performs similarly. There are two types of costs: one is financial, and the other is non-financial. The cost of recreating the software’s functionality is used to calculate value. When valuing internal-use software, the cost technique is commonly utilized. The asset approach uses both the historical cost approach and cost-to-reproduce method.
- Historical Cost Approach – Actual historical development costs, such as programmer personnel costs, are quantified (including allocations of costs of items such as payroll taxes, overhead, and a profit element, but excluding time spent by programmers on maintenance and other non-development tasks) and then time adjusted or trended to the valuation date by reference to an inflation index.
- Cost-to-Reproduce Method – The anticipated cost to construct, as of the effective assessment date, an exact replica of the building being assessed, utilizing the same materials, construction standards, design, layout, and quality of workmanship, including all flaws and super-adequacies, in as much as possible.
Income techniques calculate the value of the software by comparing it to future earnings, cash flows, or cost savings. The value of software is calculated using the discounted cash flow method as the present value of predicted future net cash flows. The cash flows are solely estimated for the software’s expected remaining life. The valuer must calculate an appropriate discount rate that considers the risk of achieving the expected results and overall economic, product, and industrial hazards.
- Direct Method – The income statement is recast on a cash basis rather than an accrual basis from the top (the income section) to the bottom (the expense part) using the direct approach (the expense part).
- Indirect Method – The indirect approach adjusts net income, which is at the bottom of the income statement, to the cash base.
Value is determined using the market approach by comparing transactions involving similar software products. The rarity of adequately comparable transactions makes this strategy difficult to employ. In comparison to the software itself, there is more data on transactions for software development businesses’ shares.
Why Get a Valuation for Your Software?
The valuation of software in companies that utilize it must be based on its contribution to the company’s income. In the beginning, one could evaluate a company’s operations before and after installing software and determine the benefits of software based on the difference.
- Know how much your software is worth – The value of software is measured in terms of future earnings, cash flows, or cost savings using income techniques. The value of software is calculated using the discounted cash flow method as the present value of predicted future net cash flows (related to revenues and fewer expenses).
- Get the Fair Market Value (FMV) of your softwar – Fair market value is the price a business, property, or another asset would sell for in an open and competitive market where the buyer and seller have sufficient information about relevant facts, a reasonable time to complete a transaction, are not under any duress, are acting in their own best interests, and mutually agree on the price.
- Advantages of Getting a valuation – A better understanding of the company’s assets. Obtaining an accurate business valuation evaluation, understanding of company resale worth, and obtaining a true company value are all critical. It allows for better mergers and acquisitions, as well as easier access to additional investors.
Get Software Valuation from Eqvista
Eqvista offers an objective valuation report that includes the effort and cost criteria of a software product. Included in the report is an overview of the process, valuation methods used and graphs supporting the analysis. By getting a valuation done by getting, you will be working with our team of NACVA certified analysts and you will be given a valuation report that sets an accurate fair market value (FMV) of your software.
- Analysis of technological, software protection, functional, adaptability of software – Our valuation team will look into these value drivers when conducting the valuation of your software. With this analysis, the valuation will look into the innovation level, ease of use of the software, adaptability of the software to be scaled to handle bigger business structures, as well as the extent of the documentation for both programmers and users.
- Cost estimation – The practice of projecting the financial and other resources required to accomplish a project within a stated scope is known as cost estimating in project management. Cost estimating takes into account all of the project’s components.
- Historical cost (asset-based approach) – Actual historical development costs, such as programmer personnel costs, are quantified (including allocations of costs of items such as payroll taxes, overhead, and a profit element.
- Cost to reproduce (asset-based approach) – The cost to duplicate is the asset-based approach. The argument supports the assumption that an investor would not pay more for a software company than it would cost to reproduce the company’s technology based on this method.
- Direct method (income approach) – The direct capitalization method establishes the value of a property based on income over one year. It is presumptively assumed that both costs and income will be constant from year to year, and it’s best for properties that provide steady income year after year because of this assumption.
- Valuation reports prepared by expert and certified valuation analysts – With our NACVA certified valuation analysts with over 10 years of experience in the accounting, finance and valuation fields, your valuation is in good hands. Our valuation reports are a great addition to your business development strategies, and also increase your chances of attracting investors for your project.
Price starts from $2,390
Getting a software valuation from Eqvista starts from $2,390, and clients receive not only a full valuation report, but also full customer service support from NACVA certified valuation analysts. A seamless, professional and timely process is guaranteed with Eqvista.
Get your software valuation today!
With Eqvista, we guarantee a tailor-made valuation report for your software. Getting a valuation can be beneficial for your software, whether you are in the process of selling it or you are getting funding for your project. To learn more about our software valuation and other valuation services, you can check our pricing page or contact us for more information.