Software Business Valuation Multiples
February 16, 2022
by a searcher from University of Pennsylvania - The Wharton School in Silicon Valley, CA, USA
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?
from Dartmouth College in Avinguda de la Granvia, 8, 08075 L'Hospitalet de Llobregat, Barcelona, España
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.
from New York University in Menlo Park, CA, USA
If the onboarding process is heavily dependent on expert services and is really a management consulting project implemented in a software framework, I'd use a 3-5x multiple.If it is truly a product offering with minimal marginal cost but lacking much growth potential, then I'd price it like a products company at 5-10x.
However you decide to price the business, from a back of the envelope perspective, you should be able to get your initial investment back in 3-5 years while still being able to pay the management team to run the business.