What is Your Software Worth?

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 knows principles of intellectual property (IP) valuation, sales expectations, 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 being upgraded. Applying simple depreciation schedules is the common solution, but does not represent at all the actual devaluation of the inherent IP. An alternate approach, focusing on ongoing maintenance, 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 and we evaluate a service business model alternative. Some conclusions are drawn that reflect on academic and business practice.