What is the value of my source code?

Question

Is there any resources or suggestions for working out the monetary value of source code for a given solution?

Generally do you just factor the development time that has gone into the work or also factor in the yearly revenue from solutions sales?

For example, lets say the solution was generating 200k per year in revenue.

What would be the best resources to read up on this topic and the value of the software company including source code? Thanks in advance for your responses.

Answer 1

Not to be snarky, but source code, like anything else, is worth exactly what one person is willing to pay for it.

Not a terribly helpful answer I know.

Put yourself in the position of the buyer. I wouldn't care how long it took to write. I only care about revenue that it can generate - be it through licensing, potential ad revenue, or a service it provides to customers, etc.

Ease of duplication is a factor. If it is a blog engine that anyone with a bit of time can put together, it's probably not worth that much. If it's a video processing engine that does useful, difficult, stuff, it's worth alot more.

Pricing is hard.

You have to demonstrate a value to the buyer.

Okay, given your 200K / year number, I'll assume that it would take 2 developers 1 year to replicate it (random numbers).

So, let's say the cost of duplication is 200K (assuming the cost of hiring a dev is appx 100K a year) and the lost revenue of that year is 200K. I would start the price at 400K, and go up from there. If you're going to use cost of duplication as a part of your pricing model, you need to make sure that that's the ONLY way to get the product the client wants. That is to say, there isn't an off-the-shelf solution that approximates it.

Edit

It looks like you're selling the business. In that case, the source code could be an asset, and you need to talk to an accountant. There are a million different ways to value "things" in a company, and depending where you are in the world, there are tax implications for what you decide. You really need to talk to an accountant who has a bit of experience with software companies.

Answer 2

What can your source code do? that is what affects the value

Answer 3

Ohloh may be of help. Note that it only estimates cost of production.

Answer 4

assuming the source code solves a problem that is non-trivial:

• the cost to replicate the solution is roughly the number of man-hours it took you to write it, times an appropriate hourly rate (i.e. your hourly rate)
• the potential revenue of the solution is an estimate of the market value of the solution assuming conventional sales and ordinary marketing expenses, times a few years (at least one, rarely more than 5)
• the comparative cost to acquire a competitor's solution

so, let's just make up some numbers for illustration purposes; let's say you wrote software to solve Problem X:

• suppose it took you 1000 hours at $50/hour, that would be $50K cost to replicate; this assumes no radical new algorithms or scientific discoveries or special knowledge/insights were required
• suppose conservative market projections would be 1000 units per year at $500 each with a 30% margin after expenses, that would be $150K/year in revenue. Times 2 years is $300K "market valuation" (most valuations are only for 1 year though!)
• suppose there are two competitors, Company X which will sell their source code for $25K, and Open Source Collective Y which gives their source code away for free on sourceforge

Now, the question is, what is the value of your source code to whom?

• the value to someone who just wants to use your software but not resell it is either:
  • $50K if they have to hire someone to write it in-house
  • $25K if they buy your competitor's software
  • ZERO if they can use the free open source software
• the value to someone who wanted to build a business reselling the software is either:
  • $50K if they can hire someone to recreate it
  • $300K if they have to buy you out completely
  • ZERO if they can use the free open source code

EDIT: valuing the company is much easier: a small multiple (like, 1) of the yearly profit (not revenue!).

Answer 5

What you're really after here is called "valuation." For less tangibles like software it's tough, but here is a starting point.

Answer 6

I'm surprised no one has asked this, but does your software use a model/pattern/idea that's patentable and thusly licenseable/sellable and making it more valuable?

I will concur with the above posts that cost of replication without anything notably unique is your likely best estimate of selling cost. Plus, if someone else chooses $50,000 for built or $50,000 for replicated (given no time constraints), I personally would opt for a replication because I could impose any potential customizations to it.

There is a very, very popular java app I almost bought for my site but because I'd have to license x # of distributions the cost to rebuild was less and the application wasn't particularly unique.

I work with a talented programmer. He doesn't work as fast as I do because he's just wired differently. If we build something new, his work will be just as good but will have taken probably 50% longer. Does that make it 50% more valuable?

My Vote:

1. Cost of Replication given nothing unique
2. Whatever the market will bear based on potential income if it's unique and patentable

Answer 7

A lot of good answers in here --

Also consider;

Your customer base has value -- if they are paying maintenance fee's the price just went up. YOU have value -- If you are connected to the acquisition, the value also goes up.

if you're bored, check out: http://www.softwarebusinessonline.com/images/valuation.pdf It's a little dated -- but some good points still ...

Answer 8

A lot of enterprisey stuff is probably worth nothing to the next guy/company because it is simply tied too much up in the existing process and existing environment. Maybe even negative value to all customers but one. I'm really a bit sceptical about giving value to software based on effort spent.