What is Your Software Worth? (full version)

Abstract

This article presents a method for valuing software, based on the income that use of that software is expected to generate in the future. It applies well known principles of intellectual property (IP) valuation, sales expectations, software maintenance, product growth, discounting to present value, and the like, always focusing on the specific issues that arise when the benefits of software are to be analyzed. An issue, not dealt with in the literature of valuing intangibles, is that software is continually upgraded. Applying depreciation schedules is the simple solution, but depreciation is taken by purchasers, and does not represent the actual diminution of the inherent IP of software at the supplier. A novel approach, which considers ongoing maintenance and its effects, is presented here. All steps of the process are presented and then integrated via a simple quantitative example. Having a quantitative model on a spreadsheet allows exploration of alternatives. As an example we evaluate a service business model alternative. Some conclusions are drawn that reflect on academic and business practice.