To value software IP, define the rights being valued, establish who owns them, identify the economic benefit attributable to those rights and select a method supported by evidence. Development spending and a company’s latest fundraising valuation are useful context, but neither automatically gives the software’s standalone value.
Define the software asset before modelling its value
“Our platform” can include proprietary source code, databases, algorithms, documentation, trade marks, third-party components and the work of the delivery team. These are not interchangeable assets. State whether the instruction concerns ownership, a licence, a specific module or a defined bundle of rights.
Record the valuation date, purpose, territory, exclusivity and intended use. A lending discussion, licensing negotiation, transaction and financial reporting exercise may require different instructions and specialist input. An IP valuation engagement should establish these points before selecting a method.
Check employee and contractor agreements, assignments, open-source obligations, third-party licences and relevant customer rights with legal specialists where needed. Possessing a copy of the code does not by itself establish that every commercial right can be transferred.
Which valuation method fits software IP?
The Intellectual Property Office’s guide to valuing intellectual property describes cost, market and income approaches. Its discussion of royalty savings provides a useful starting point for the example below; it does not prescribe a software royalty rate.
| Approach | What it considers | Important limitation |
|---|---|---|
| Income | Future economic benefits attributable to the defined rights. | Forecasts, economic life, attribution and risk must be supported. |
| Market | Comparable asset sales or licence agreements. | Rights, exclusivity, territory, support and payment terms may differ. |
| Cost | Cost to recreate or replace equivalent functionality, with relevant adjustments. | Past spending may include failed work and may not reflect earning power. |
Choose the method because it fits the asset and evidence. Cross-checking can be helpful, but averaging incompatible numbers does not make an assessment more reliable. Company value also includes factors beyond the software, such as customer relationships, distribution, staff and cash.
Worked example: royalty savings over three years
This is an educational, pre-tax calculation using invented assumptions, not a market benchmark, formal valuation or client result. Assume a software module supports relevant annual revenue of £1 million, growing by 10% for the next two years. For illustration only, use a 3% royalty assumption, a 15% annual discount rate, year-end cash flows and a three-year benefit period.
The example assumes the royalty basis is the revenue shown. It excludes tax, tax amortisation benefits, additional asset-specific costs, terminal value and benefits after year three. A real valuation must assess the appropriate basis and adjustments, and use cash flows and a discount rate that are consistent with each other.
Illustrative annual saving
Relevant revenue × assumed royalty rate
Present value
Annual saving ÷ (1 + discount rate)year
| Year | Relevant revenue | Saving at 3% | Discounted at 15% |
|---|---|---|---|
| 1 | £1,000,000 | £30,000 | £26,087 |
| 2 | £1,100,000 | £33,000 | £24,953 |
| 3 | £1,210,000 | £36,300 | £23,868 |
The sum of the unrounded discounted savings is approximately £74,908. This is the present value of the specified three-year pre-tax savings under these assumptions. It is not the value of the whole business and is not automatically a concluded software IP value.
Why the assumptions matter more than a neat answer
Keep the revenue, life and discount rate unchanged, but vary the invented royalty assumption:
| Assumed royalty | Present value of savings |
|---|---|
| 2% | £49,938 |
| 3% | £74,908 |
| 4% | £99,877 |
A royalty assumption moving from 2% to 4% doubles this simplified result. That is why “use 3%” is not a valuation policy. Relevant licence evidence needs to match the rights, functionality, margin economics and contractual obligations. A royalty calculated on total company sales may be inappropriate when only part of the business uses the asset.
Test economic life, obsolescence, maintenance needs, revenue dependency, customer loss and alternative technology. Avoid counting the same risk twice, for example through both an unsupported revenue haircut and an additional discount-rate premium for the identical exposure.
What changes for AI and data-based software?
Separate the software rights from the data and model rights needed to operate it. Investigate whether training data, model access, cloud services or third-party APIs can continue on the assumed terms after a transaction. Revenue may depend on licences the business does not own or cannot transfer.
Compute charges, inference costs, human review, implementation and ongoing development can affect commercial benefit. Faster adoption does not establish stronger margins. The underlying financial model should connect usage, pricing and delivery costs before the valuation extrapolates growth.
Information to prepare for a software IP valuation
- A description of the asset, functions, ownership and relevant restrictions.
- The purpose, valuation date, users and proposed transaction or licence terms.
- Revenue by product or module, customer evidence and forecasts with assumptions.
- Maintenance, hosting, support, development and third-party licence commitments.
- Available comparable licence evidence, with an explanation of differences.
- Commercial life, replacement risks and alternative technology assumptions.
Keep a clear distinction between the value of the asset, the value of a licence and the equity value of the company. A usable report explains that bridge, its evidence and its limits.
Frequently asked questions
Is software IP worth what it cost to develop?
Not automatically. Development cost can inform a cost approach, but it may include failed work and may not reflect current utility, obsolescence, ownership or the asset’s ability to generate economic benefit.
Can I use a 3% royalty rate for my software?
Not on the basis of this example. The 3% assumption is invented for teaching. A real assessment needs relevant evidence and analysis of rights, functionality, revenue basis, margins and licence obligations.
Is the worked result the company valuation?
No. It is the present value of three years of illustrative pre-tax royalty savings. Company value can include other assets, liabilities and commercial factors, and a formal IP valuation requires further analysis.
Can pre-revenue software have value?
Yes, but lack of trading evidence makes commercial assumptions more uncertain. Assess the defined rights, development progress, alternatives, likely economic benefits and the suitability of the chosen method.
Does an IP valuation prove ownership?
No. Ownership, assignment, enforceability and transfer restrictions need appropriate legal evidence and specialist advice. Financial valuation work does not replace a legal title review.
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Over 12 years across Big Four audit, Investment Banking, and corporate advisory. Kish works with SaaS founders, tech companies, and ambitious UK SMEs from £1M to £50M in revenue on fundraising, valuations, exit planning, and financial strategy. ICAEW regulated. Big Four trained. Based in London.