Software and SaaS Valuation: Economic Value and AI Impact

How to determine the value of a software asset within the framework of intangible asset valuation?

Introduction : Software, a core intangible asset driving value creation

In today’s digital economy, software has become a primary engine of competitiveness and differentiation. Whether delivered as a SaaS solution, embedded in a proprietary algorithm, deployed as a technology platform, or used internally to structure and automate industrial processes, software is a strategic intangible asset whose economic value extends well beyond its development cost.

Under the International Valuation Standards issued by the International Valuation Standards Council (IVS 210 – Intangible Assets), an intangible asset is considered identifiable when it is capable of generating future economic benefits and can be distinguished from other assets of the business.

Under Swiss law, software is primarily protected by copyright. Article 2(3) of the Swiss Federal Act on Copyright and Related Rights (CopA) explicitly recognises computer programs as protected works, without requiring any filing or registration formalities.

French law follows a similar logic. Article L112-2 of the French Intellectual Property Code (Code de la propriété intellectuelle) expressly includes software among protected works. Since the law of 3 July 1985 (now codified in the Intellectual Property Code), software benefits from a specific regime, notably governing ownership of economic rights when the program is developed by an employee in the performance of their duties (Article L113-9). As in Switzerland, no filing formalities are required for protection to arise; protection follows from creation itself, subject to originality.

However, legal protection does not, in itself, determine economic value. As Professor Aswath Damodaran emphasises, “the value of an asset is a function of the cash flows it generates, the risk attached to those cash flows, and their expected growth.” Applied to software, this principle highlights a key point: code, in and of itself, does not create wealth. Only effective or potential monetisation can convert technological innovation into financial performance.

This raises the core question addressed in this article: how can the economic value of a software asset be determined rigorously within the broader valuation of a company’s intangible assets, without conflating development cost, technological potential, and the actual ability to generate revenues?

To address this question, the analysis is structured in three stages. First, we outline the framework and rationale for software valuation, including the situations in which it is required and the key legal and economic specificities. Second, we set out the typical structure of a valuation report and the main methodological approaches available, including a negotiation-oriented perspective. Finally, a practical case illustrates the determination of software value in the context of a negotiation between a startup and an academic partner, followed by a structured synthesis.

Framework and rationale for software valuation

Why value software?

Software valuation aims to determine, at a given date and within a defined context, the economic value of an intangible asset whose substance is technological but whose implications are primarily financial. Unlike tangible assets, software does not generate cash flows autonomously. Its value derives from its exploitation within a structured business model—whether as SaaS, as a licensed component embedded in an industrial product, or as an internal tool driving operational efficiency.

In practice, software valuation is required in various situations such as a business disposal, a fundraising process, an in-kind contribution, an intra-group reorganisation, contractual negotiations, or litigation. In each case, the purpose of the valuation affects the level of conservatism, the depth of analysis, and the choice of methods. A valuation performed for a transaction does not follow the same requirements as a valuation performed for tax or financial reporting purposes.

Conceptually, software value rests on its ability to generate identifiable future economic benefits, consistent with IVS 210. The asset must be identifiable, controlled by the company, and capable of producing measurable economic benefits. The challenge is that software value should not be confused with development cost, technological sophistication, or code volume. It depends primarily on how the software integrates into the value chain, its market adoption, the stability of its legal ownership, and its capacity to sustain a durable competitive advantage.

Companies concerned by software valuation

Software valuation is not limited to technology startups. It concerns a much broader range of economic actors whenever a software program constitutes a strategic, differentiating, or revenue-generating asset.

Technology startups and SaaS companies are naturally concerned. In these businesses, software is often the core asset and sometimes the only material asset of significance. Valuation typically arises in the context of fundraising, investor entry, shareholders’ agreements, or negotiation with an industrial partner. Software value then directly influences pre-money valuation and capital allocation.

Industrial companies are also concerned, particularly where they develop embedded software, control systems, automation solutions, or internal optimisation tools. In such cases, software may be embedded in the end product or represent a key differentiator. Its valuation becomes relevant in carve-outs, business disposals, or M&A transactions.

Established groups may need to value software assets in intra-group transactions, reorganisations, or in-kind contributions. International financial reporting standards—particularly IFRS (IAS 38 – Intangible Assets)—require the identification and, where applicable, separate recognition and measurement of certain intangible assets in business combinations.

Academic institutions and research centres are also concerned where software developed through scientific work is subject to economic valorisation, technology transfer, or the creation of spin-offs. In such contexts, valuation helps structure negotiations between the institution and the operating entity, providing a rational basis for a licence or equity participation.

Finally, investors—venture capital funds, family offices, and strategic buyers—frequently rely on software valuation in due diligence processes. The analysis goes beyond historical performance and focuses on technological robustness, scalability, and the sustainability of future cash flows attributable to the asset.

Accordingly, software valuation is not reserved for purely digital companies. It becomes critical whenever software represents a meaningful driver of value creation or a determining asset in a strategic transaction.

Economic and technical specificities

Software valuation has features that distinguish it from other intangible assets, particularly patents. While patents grant a time-limited legal monopoly, software is primarily protected by copyright. This protection covers the expression of code rather than the abstract functionality. As a result, software economic value depends less on legal exclusivity and more on technical quality, execution performance, architecture, and—critically—its integration into a user ecosystem.

A further key factor is dependence on human capital. A software asset may have strong economic potential yet see its value materially weakened by poor documentation, high technical debt, or a critical dependency on a key developer. Valuation therefore requires organisational and operational analysis in addition to financial modelling.

Moreover, software typically has a shorter lifecycle than traditional industrial assets. Fast technological change, competitive pressure, and obsolescence risk require a prudent view on forecast horizon and discount rate assumptions. Technological risk, combined with commercial risk, directly affects the asset-specific risk premium applied in valuation models.

Economic rationale for valuation

From a financial perspective, software value corresponds to the present value of the cash flows attributable to it. As Damodaran sets out, asset value depends on expected future cash flows, the risk attached to those cash flows, and expected growth. This framework requires isolating the cash flows genuinely attributable to the software, assessing the asset-specific technological and commercial risk, and analysing market growth dynamics.

The purpose of valuation is not to produce a theoretical maximum value, but to derive an economically grounded estimate that is coherent with the use case and capable of withstanding scrutiny. The valuer must articulate technical analysis, strategic understanding, and financial modelling to convert a technological asset into a defensible monetary value.

The next section sets out how these principles translate into the structure of a valuation report and the selection of methodological approaches appropriate to the software’s characteristics.

Valuation report structure and methodological approach

Software valuation cannot be reduced to a financial model. It relies on a structured rationale combining legal analysis, technical understanding, market assessment, and economic modelling. The credibility of the report depends less on modelling sophistication than on overall coherence, traceability of assumptions, and the alignment between the chosen method and the asset profile.

A software valuation report should enable a third party—investor, court, tax authority, or contractual counterparty—to understand clearly how value has been determined, on what basis, and within what limitations.

Company and software overview

A report typically begins with a concise presentation of the company holding the software and of the software asset itself. The objective is to position the software within its economic, organisational, and strategic environment.

The company overview identifies the business model, competitive positioning, operational maturity, and the extent to which the business depends on the software. It should clarify whether the software is the core value driver (as in SaaS), a differentiating component of a broader product, or an internal tool supporting operational efficiency.

The software overview should describe functionality, high-level architecture, development stage, history, and key technical characteristics. It should also define the precise valuation scope: relevant version, included modules, existing documentation, dependencies, and any third-party or open-source components.

The goal is not to provide exhaustive technical documentation, but to ensure clarity on what is being valued. Ambiguity around scope is a frequent source of fragility in software valuations.

Market overview

Market analysis contextualises the asset within its competitive environment. It addresses total addressable market, growth dynamics, maturity, and barriers to entry. This step supports the assessment of software economic potential and the sustainability of future cash flows.

Software value depends as much on product quality as on the depth and structure of the market it serves.

Legal analysis and ownership of rights

A rigorous valuation requires confirmation that the company effectively holds the rights to exploit the software and that no legal uncertainty could impair its use or commercialisation. Software value depends on effective control. A break in the chain of title may materially reduce value or compromise a transaction.

Under Swiss law, protection is governed by the Swiss Federal Act on Copyright and Related Rights (CopA). Article 2(3) confirms that computer programs are protected by copyright. For works created in an employment context, Article 17 generally allocates economic rights to the employer where the software is developed in the course of professional duties, unless agreed otherwise.

Under French law, protection is governed by the Intellectual Property Code. Article L112-2, 13° qualifies software as a protected work. Article L113-9 provides that where software is created by an employee in the performance of their duties, economic rights are automatically vested in the employer. This specific regime distinguishes software from other works.

In both jurisdictions, protection arises upon creation (subject to originality) and does not require any filing. However, effective ownership depends on contractual arrangements.

The valuation report should therefore review employment contracts, contractor agreements, any assignment clauses, and the use of open-source components that may impose obligations (copyleft, redistribution restrictions, publication requirements). It should also identify any existing licences, third-party usage rights, or contractual limitations that could restrict exploitation.

Any uncertainty in the chain of rights represents a legal risk factor that should be reflected in the qualitative assessment and, where relevant, in the discount rate or a specific value adjustment.

Qualitative assessment of the software

This section is the analytical core of a software valuation report. Before modelling, it is essential to assess the software’s intrinsic and extrinsic quality—its technical robustness, architectural coherence, and real capacity to support a viable business model. Software value is not solely driven by revenue potential, but by technological and organisational resilience.

Intrinsic analysis starts with architecture: code structure, modularity, separation of layers, maintainability, and integration capability. A clear, scalable architecture supports longevity, whereas monolithic or poorly documented code increases operational risk.

Scalability is another key factor—whether the software can support growth in users, data volumes, or processing complexity. Technical limitations can constrain growth and affect projected cash flows.

Technical debt must be assessed carefully. It reflects technical trade-offs that may generate future refactoring and maintenance costs. High technical debt can shorten economic life and increase the investment required to keep the software operational.

Cybersecurity and regulatory compliance are also critical. The assessment should cover security protocols, backup procedures, access management, and applicable regulatory requirements, particularly data protection. Structural weaknesses can expose the business to legal and reputational risk.

Extrinsic analysis considers positioning within the economic environment. It includes technology maturity (often referenced through frameworks such as Technology Readiness Levels), user adoption, customer base stability, and revenue recurrence. Broad adoption and ecosystem effects typically indicate a lower risk profile than an experimental product.

Key-person dependency is another factor. Where code understanding and product evolution depend on a limited number of individuals, value may be vulnerable to departure risk. Documentation quality, internal procedures, and team structure mitigate this risk.

These factors can be summarised through a structured scoring framework, with weighted criteria such as technical robustness, commercial maturity, legal security, and evolvability. Scoring does not replace financial analysis; it helps objectify strengths and weaknesses and informs modelling adjustments (forecast horizon, asset-specific risk premium).

Valuation approaches

Software valuation relies on established intangible valuation methods adapted to the asset’s technological and economic characteristics. Under IVS 210, three primary approaches structure market practice: the cost approach, the market approach, and the income approach. In certain cases, a real options approach may also be relevant.

No method should be applied mechanically. Method selection depends on software maturity, the existence of identifiable cash flows, the availability of comparables, and the valuation context—transaction, tax, dispute, or contractual negotiation.

In practice, some valuations occur in a specific context: negotiation between a software supplier and its counterparty. In such cases, the objective is not necessarily to determine full ownership value, but to establish a commercially sustainable licence fee, maintenance fee, exclusive usage right, or revenue-based royalty. The valuation then provides an economic basis for balanced contractual terms.

In that context, traditional approaches remain relevant but serve a different purpose. The income approach may estimate the value captured by the customer from using the software. The market approach may inform the reasonableness of a royalty rate or subscription pricing. The cost approach may provide a minimum reference point, particularly for custom-built software.

Valuation thus becomes a contract structuring tool, translating the software’s economic contribution into measurable financial mechanisms while considering risk allocation, term, and operational dependency.

Software valuation methodologies

Cost approach: estimates value based on the investment required to create or recreate the software, using historical costs (developer compensation, third-party services, infrastructure, testing and validation) or current replacement cost. It is particularly relevant for development-stage software or where operating history is limited, but it does not capture future economic potential or market adoption value on its own.

Market approach: relies on comparable transactions involving similar software or technologies, including asset disposals, M&A transactions, or licence agreements. It may use observed multiples or sector royalty rate benchmarks expressed as a percentage of revenue. Given the scarcity, heterogeneity, and confidentiality of available data, careful judgement and adjustments are required to reflect scope, maturity, geography, and risk profile.

Income approach: typically forms the core method for software that is exploitable or near-term exploitable. It estimates the economic cash flows attributable to the asset and discounts them at an asset-specific rate. Depending on the business model, this may be implemented as a DCF or a relief-from-royalty method, valuing the software as if licensed. Discount rate assumptions may be informed by academic and practitioner frameworks, including Damodaran’s sector risk premia. Where market references are insufficient, an intrinsic royalty rate may be derived from appropriate financial modelling.

Real options approach: explicitly models technological uncertainty and managerial flexibility associated with software development and exploitation. Based on frameworks developed by Black, Scholes, and Merton, and the Cox-Ross-Rubinstein binomial model, it extends income-based approaches where a material part of value lies in strategic optionality and adaptability.

Negotiation approach: in certain contexts, valuation does not aim to determine a full asset value but to set an economically sustainable remuneration level under a licence or partnership agreement. This is particularly relevant where a supplier—such as an academic institution—provides a software building block that the counterparty must finalise, integrate, finance, and commercialise.

How to value a SaaS software solution?

Valuing software under a SaaS model has specific features compared to traditional licensing. In SaaS, value is driven not only by technology, but by the combination of code, infrastructure, customer base, and recurring revenue.

The income approach is generally central. Valuation relies on forecasting cash flows generated by subscriptions, incorporating key drivers such as:

customer retention (churn),
revenue growth, customer acquisition cost (CAC),
recurring gross margin,
and upsell/cross-sell potential.

In SaaS, value is strongly tied to cash flow predictability and the depth of the customer base. A technically strong product with high churn will typically suffer a material value discount.

Scalability must also be assessed. A well-structured SaaS model can generate significant operating leverage, with profitability increasing as users grow without proportional increases in fixed costs.

Finally, the valuer should distinguish the intrinsic value of the software from value attributable to commercial execution. Where the purpose is specifically to value the software asset, the contribution of the technology must be isolated from broader business capabilities.

How to set a software royalty rate?

Determining a software royalty rate cannot rely on a single sector benchmark. It requires a contributory economic analysis.

The rate should reflect:

the software’s true share in overall value creation,
the degree of technological differentiation,
substitutability, the level of exclusivity granted,
and risk allocation between the parties.

A structured approach starts from the project’s overall margin and then allocates value among contributing assets (technology, infrastructure, distribution, financing). The royalty rate should be consistent with this allocation. In some cases, relief-from-royalty can be applied: estimating the royalty an operator would pay if it did not own the technology, then discounting those royalty savings.

An excessive rate can undermine the sustainability of the business model. Conversely, an unduly low rate may under-compensate innovation. The objective is to reach a commercially viable and economically balanced outcome.

Software valuation discounts in 2026: the impact of artificial intelligence

The year 2026 marks a notable shift in technology asset valuation. The widespread adoption of AI tools and “AI-as-a-Service” solutions has materially lowered technical barriers to entry.

It has become possible to develop advanced software components with reduced cost and time. As a result, the scarcity of code as a standalone asset has diminished.

This drives downward pressure on certain valuations, particularly where:

software does not benefit from exclusive access to proprietary data,
a structured user ecosystem,
controlled distribution,
or a durable and hard-to-replicate competitive advantage.

Value is increasingly concentrated in strategic integration, data quality, commercial execution capability, and the robustness of the business model.

In this context, software valuation requires a finer and more critical analysis. The mere existence of an algorithm or platform is no longer sufficient to justify high multiples. Economic sustainability and competitive depth have become decisive factors.

Software sector royalty rate table (2024–2025) for intangible asset valuation

The sector royalty rate table provides a key reference point in software valuation, particularly when applying the income approach via a royalty-based method. It anchors the valuer’s assumptions in observed licensing practices across technology markets, providing order-of-magnitude benchmarks derived from negotiated licence agreements.

In 2024–2025, these benchmarks remain useful to assess the reasonableness of assumptions, without replacing asset-specific analysis. Compared to patents, software royalty rates tend to exhibit wider dispersion due to diverse business models (SaaS, OEM, perpetual licence, APIs, white-label), varying integration levels within broader solutions, and differing degrees of strategic dependency for the licensee.

The rates presented are derived from aggregated analyses based on software licensing agreements observed over an extended period. They are expressed as a percentage of revenue generated from the software’s exploitation and presented as an indicative median, an interquartile range (1st–3rd quartile), and a broader observed range. This statistical framing reflects market dispersion and distinguishes frequent market zones from atypical situations.

In a valuation report, the table is used as a comparative benchmark. It helps identify a rate range consistent with the relevant sector and the software’s differentiation profile. Its use requires prudent judgement, considering commercial maturity, functional scope, exclusivity, geographic coverage, expected term, and risk allocation between parties.

To ensure robustness and defensibility, the rates are presented in aggregated and anonymised form. They are neither automatic norms nor contractual recommendations, but benchmarks supporting professional judgement.

The objective is not to replicate observed rates mechanically, but to position the selected rate within a market-consistent and methodologically justified framework aligned with the specific characteristics of the software asset and the transaction context.

Table caption Indicative royalty rate ranges observed in international software licensing markets (aggregated analysis based on market practice and Hectelion valuation engagements).

‍CEO’s message

Software valuation is now a strategic priority for innovative companies, academic institutions, and investors. Contrary to a common misconception, the value of software cannot be reduced to development cost or code complexity. It is driven by the ability to generate future economic cash flows, the strength of legal structuring, and its integration into a viable business model.

The year 2026 represents a meaningful inflection point for the technology sector. The widespread democratisation of artificial intelligence tools and AI-as-a-Service solutions has materially reshaped barriers to entry. It is now technically easier and less costly to develop advanced software solutions, including in areas previously considered highly specialised.

This shift has two economic implications. First, the ability to create software building blocks has become more broadly distributed, reducing technological scarcity. Second, lower technical barriers exert downward pressure on certain valuations—particularly where software lacks a durable competitive advantage, a structured ecosystem, or strong complementary assets (proprietary data, distribution, captive customer base).

In 2026 we therefore observe valuation discounts in certain tech segments—not because value has disappeared, but because the drivers of value creation have changed. Simply owning software is no longer sufficient. Value increasingly resides in strategic integration, data quality, commercial execution capability, and the sustainability of the business model.

Across our engagements, we often observe that discussions around software value are approached intuitively, and at times emotionally—particularly during negotiations between founders, industrial partners, or academic institutions. The absence of a structured contributory analysis frequently leads to contractual imbalances that can weaken long-term project viability.

The purpose of a robust valuation is not to artificially maximise value, but to determine an economically coherent, defensible, and sustainable estimate for all parties. It should enable objective decision-making, support negotiation structuring, and ensure balanced value allocation.

At Hectelion, we view valuation not as a theoretical exercise, but as a strategic decision-support tool—serving those who build ambitious technology projects in a rapidly changing environment.

Conclusion – Rethinking software value in the age of artificial intelligence

Software valuation can no longer be approached through a purely technical or historical lens. In an environment shaped by the democratisation of AI tools, reduced development barriers, and accelerating competitive intensity, technological scarcity has evolved. Value no longer resides solely in the existence of code or algorithms, but in the ability to sustain a durable economic advantage.

Traditional valuation approaches—cost, market, income, and real options—remain fully relevant. They provide a structured analytical framework and support valuation robustness. However, their application must be adapted to a context where differentiation is more demanding and business models face greater competitive pressure.

Sector royalty rate benchmarks are useful reference points, but they must be interpreted in context. Easily replicable or substitutable technologies cannot command the same remuneration levels as assets supported by proprietary data, strong ecosystems, or proven execution capability.

In 2026, valuing software therefore requires a strategic lens as much as an economic one—distinguishing durable innovation from basic functionality, structural advantage from narrative effects, and genuine value creation from opportunistic pricing.

A rigorous valuation makes these distinctions explicit. It is a structuring instrument for negotiations and a tool to secure financial decision-making. In a world where technology becomes accessible to all, methodological discipline is more essential than ever.