Software Business Valuation Multiples

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by a searcher from University of Pennsylvania - The Wharton School
in Silicon Valley, CA, USA

4yrs ago

Software Business Valuation Multiples

Hello Searchfunder community!
We are looking at small software companies and would like to hear the community's opinion on valuation. Companies we are looking at develop and license software to SMBs (not SaaS). Several targets are about $3M revenue, $350 EBITDA. Companies haven't historically had large annual growth, getting to only $3M revenue in 15+ years.

What do you all think the market valuation range is for a company like this?

1 Like

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reply by a searcher 4yrs ago
from Northwestern University in Minneapolis, MN, USA

Microacquire just released a report with some stats: redacted

Also, I've been recommend SEG's 2022 report: redacted

reply by a searcher 4yrs ago
from Dartmouth College in Avinguda de la Granvia, 8, 08075 L'Hospitalet de Llobregat, Barcelona, España

The 3-5x EBITDA multiple mentioned seems reasonable. I would also check what's the maximum you can pay to achieve your IRR target given the slow growth rate they currently have.

On the other hand, I'd try to understand their product, how it's built and how it can evolve. It's common that the type of company you describe has substantial technical debt. This technical debt can hamper your growth aspirations, and paying off that debt will take capital and time, which can hurt your returns. So, take it into account when thinking about how much to pay for the business.

Summarizing, I would work backwards from the IRR you're targeting and the growth rate they currently have, to get a maximum price. Repeat the exercise adding some opex cushion that you'd use to scale. Then use that as your reservation value for the negotiation and start on a lower price. It's likely to end up in that 3-5x range, but better to do some rational thinking about it than just accept it's the market multiple.