Software Company Business Valuation

What business valuation would you place on asoftware platform and reducing the number of
distribution management software company withsupported systems
$1.5 million in annual revenues and $500,000 in4. Immediately end customer defections by
losses? How about a healthcare software ASPannouncing an actual upgrade path versus years
with $300 K in revenues that is breaking even?of promises
These companies don't exactly fit the 5 times5. Prevent a more formidable competitor from
EBITDA or the discounted cash flow valuationgetting his hands on this technology and causing
models.them some real damage
That is what makes software or technologyThe good news is it worked and we were able to
based companies so much fun to sell. Arriving at aget our sellers north of $2.5 million. Over a year
business value is done the old fashion way. Youlater it has proven to be a good deal for both
identify the universe of likely buyers, preparebuyer and seller.
your blind profile and NDA, and contact theThe healthcare ASP also turned out to be a
president or person in charge of mergers andstrategic fit for a much larger healthcare IT firm.
acquisitions. What you are trying to accomplish isThis established company had previously delivered
to identify and articulate the strategic rationale fortheir software through a traditional licensing
considering this acquisition.approach where their clients managed their own
In the example above, our distributioninternal systems. The buyers needed our client's
management software company had adaptedcutting edge module that completed their suite of
their software to a new vertical market while alsoproducts. They intend to use the ASP model as
introducing it on Microsoft's.NET platform andthe springboard to launch their entire product suite
upgrading from green screen to GUI interfaces.on the ASP model to complement their licensing
They were not getting any traction in the newapproach.
vertical competing against the two dominantMuch of this transaction value was in the form of
players in that space. They had, however,a well structured earn out. Both buyer and seller
created a lot of value in their technology. Theyfeel comfortable that the sales targets will be met
were a very good acquisition candidate for one ofand will provide the maximum contractual
the dominant competitors. They hadpayment. This will result in a value for the seller of
"leap-frogged" this competitor with a moreabout $2.5 million. The buyer's customer base of
modern platform. The competitor, through a1400 hospitals are prime candidates to upgrade
series of prior acquisitions, was actually supportingtheir current software system (the buyer's
six different software platforms for essentiallyproduct of course) with this new capability. The
the same capability. They were contemplating aseller achieves a 20 times improvement in the
long and expensive system rewrite. They neededsale of their product as part of the large
to consolidate platforms, but did not have ancompany. The large company increases revenues
upgrade path for their installed clients. Their clientsand uses a portion of that revenue to complete
were vulnerable to defections.the purchase price obligation. It was accretive
We approached the president and positioned ourfrom day one.
client as follows:When it comes to software or technology
1. Purchase our client for a favorable buy versuscompanies and business valuation, beauty is in the
build outcome.eye of the beholder. If the company can identify
2. Time to market - We could provide anthe right buyers and if they can be positioned as
immediate upgrade path versus eighteen monthsa strategic fit, traditional valuation metrics may
of developmentnot apply.
3. Substantial cost savings - By rationalizing their