What is your Asset?
A better way to value technology license product company value
In the famous book Rich Dad Poor Dad, Robert Kiyosaki redefined the accounting term “asset” to mean something you own that generates money. Using his definition, the house you live in may be an asset for accountants, but an expense according to him (and now me). I found this redefinition very useful in my personal life and then soon found myself trying to redefine asset as I looked at evaluating company value for purposes of company merger or payout.
Using a Kawasaki-esque, practical approach, we see that the the Intellectual Property (IP or source code) is only valuable if and when people buy licenses. Moreover, existing license sales are only valuable if the licenses can be sold at a profit and the number of customers is only valuable if they are receptive to buy more licenses or support. Given this, how can we measure the value of the asset in a meaningful way?
I have never been impressed with any company evaluation equation in the technology sector nor have I found accounting standards good arbiters of success. However, in the case of mature mode, enterprise class software, I believe there is a simple measurement of one single value that defines the value of the asset in the same intuitive and useful way as Kawasaki. That single measurement: Total value of list license price under an active maintenance contract (LLPUAC) is directly proportional to company value and that two different companies (in the same sector) could be directly compared by looking at the ratios of their LLPUAC values to determine the ratio of their relative company value. I believe that this one single measurement encompass nearly everything likely to be important about a company (or product) value in this category. This means that lines of code, annual revenue, human capital, brand equity, cost of sales, and other common measures are irrelevant once you have LLPUAC. My reasoning: Read more…