Website Valuation

Software Valuation

Valuing the software component of any web business is a place the uninitiated can fall into trouble. It is important to remember a few key points when dealing with software.

There are 2 types of software within your typical web firm, licensed and in-house software.

Licensed Software

Software licenses come in many forms and it is important when valuing a web business that you make sure that you ascertain:

• What licenses are required to run the business?
• What type of license are they, what restrictions do they have?
• If the licenses require renewel, when will this be and how much will it cost?

The value of unnecessarily expensive software licenses could, at your descretion be reduced to a more reasonable value if the extra expenses incurred from this license do not represent any extra value attained.

In-House Software

Questions to ask in regard to software developed in house are:

• Is the the in-house software unique?
• Can comparable software be purchase on the web and for how much?
• What maintenance is required on the in-house software?
• Does comparable software require the same less or more maintenance?

If the software is unique then its value should be represented by the lesser of cost of developing a similar product and the discounted cash flows generated by the product.  If the software is not unique, then the softwares value should at most be the cost of installing an alternative (assuming maintenance costs are comparable).

For some people this will be quite a shock, especially since there are plenty of open source alternatives available for free. To those people I say, if you are not engaged in a particular use of the software that is incompatible with the licenses of freely available software, and there is no market you can access where people would wish to license your software, then your software, no matter how well programmed and how expensive to develop is almost worthless.

Maintenance

Another hazard to be aware of when buying websites is the maintenance of software systems. Some software, like site scrapers for example require constant updates to keep functional. If you do not have those abilities and don't have a way to easily contract those abilities then you may find yourself with a site you are unable to run. Some websites have code that no one but the original owner could maintain!

Maintenance can be a hazard with not only in-house software, but with purchased software as well so always make sure if you are buying a site to get the full picture in regards to software and maintenance. If you are selling a site the above should have given you some strong ideas on what you could do to improve the salability of your website.