Software company ebitda multiples

If the business has a strong backlink profile and ranks well for a high number of relevant keywords this is considered a strong, defendable platform for organic customer acquisition. Conversely, if the business is engaged in price-wars in paid search with competitors, this is understandably considered a weaker acquisition channel. Small- and mid-market SaaS business trying to outbid in that niche will suffer a short-lived PPC lifecycle. The ultimate appraisal of customer acquisition channels are the associated conversion and cost attached to each.

Here the conversion-to-trial ratio and conversion-to-paid ratio are carefully eyed by investors, as well as the associated CAC. To summarize, a premium SaaS business is one that has multiple customer acquisition channels with high defensiveness and solid conversion metrics for each. Eventually all software needs development to keep up with customer requirements or to grow the business further. While every SaaS business is unique in its development requirements, when the business comes to market, it is generally best practice to have the product in a high point of its development life-cycle, or in other words, not requiring a major update any time soon.

This gives the new owner some runway ahead of any major development and provides some comfort that the current management has not simply given up on the business and is passing over ownership at a time when the product needs care and attention. In the diagram above, it is the equivalent of selling at point A, where the software is maturing, and point B where the software has aged too much and is in need of development to promote further sales.

As mentioned briefly, the amount of owner involvement in the business and particularly the nature of the work can be a sensitive valuation factor for SaaS businesses.

At first this might seem counter-intuitive to a SaaS entrepreneur. More technical input from the owner i. All of the above could be true, but an investor still needs to either be able to do the same work themselves or pay for someone else usually at a high cost. Factoring this into the SDE will ultimately lower the valuation. One might be tempted to instead pursue investors that can readily resume the same responsibilities themselves i. SaaS businesses that therefore have the burden of development work on reliably outsourced contractors will benefit from a perceived easier transfer of ownership and a greater pool of investors as a result.

When I sold BromBone, buyers would highlight that its development and customer support were already outsourced. The only role they needed to replace was my marketing outreach, which meant it was an easier business to take on. Eventually we sold to a non-technical buyer for a great valuation. Competition in the niche is of great interest to investors when evaluating a SaaS business. Clearly the level of competition is important to understand for any business acquisition, but this is especially true in the SaaS space.

In SaaS it becomes of acute interest because of the generally higher number of VC-funded players in the industry and the high development costs associated with the business model. Small- and mid-market SaaS business in a highly competitive niche will tend to find itself under-funded and unable to compete with the development efforts and features of better-funded, VC-backed SaaS companies.

The SaaS businesses that achieve a premium are almost always products that are prepared for growth at scale. You can add hundreds of thousands of dollars of value to a business by taking the right steps before a sale.

Naturally not all the valuation factors are addressable e. A highly interesting read. This double-win means that effective outsourcing is one of the greatest levers of exit value for SaaS business owners. The focus here should be on effective and proven outsourcing. A haphazard attempt to move customer support to an unproven call center in the Philippines will not be regarded favorably.

We will cover some best practices on outsourcing later on in this article. It might seem obvious, but a surprising number of business owners fail to properly secure their intellectual property ahead of a sale, which can have detrimental effects on the transaction later on.

Trademarks tend to be easier, shorter and less expensive to apply for than patents. Any individual that was involved in writing code or developing the product should be asked to sign an IP assignment for their work. This is particularly relevant to contractors hired from freelancer marketplaces as well as any other third-party company used. A well-documented, annotated and tested source code is a distinguishing factor of premium-valued SaaS businesses.

It can be a deal-killing issue and is one that is readily avoidable through adequate preparation ahead of coming to market. Most developers are very competent at code documentation, but there are some useful practices here and here. As we looked at above in the product lifecycle analysis, where the product is at in its development cycle when it comes to market is important to investors and influential on the exit multiple. Business owners plotting a sale should think about planning their next major upgrade months ahead of going to market.

This has a number of short and medium-term benefits. First, it brings some immediate additional earnings to the current owner, assuming a positive uptake and increase in trials for new customers. Second, it lifts the earnings figure the SDE which forms the basis of the sale valuation. Third, assuming a positive take up, it will create positive customer feedback and potentially PR as well. Tempting as it can be for some business owners, launching an unprecedented sale of annual plans to book a large amount of revenue ahead of a sale is not a wise strategy.

Sellers have been known to do this to inflate the valuation ahead of a sale and to generate additional cash. Unfortunately, all buyers see through this strategy and either discount the relevant months or steer clear of the sale entirely. Unserved portions of packages sold on annual plans are often rebated to a new owner, so this is a pointless exercise. The key to a successful exit is to continue to run the business in a similar fashion in the months before and during the sale. If a sale is seasonal e.

Black Friday , that is an acceptable event to run a discount. Healthcare technology companies, including software, SaaS, and others, continue to be in high demand. Acquisitions and consolidations are being driven by significant technological, regulatory, and social changes. Hi David! Hi Microcap: this is a really useful analysis.

Thank you! Thanks for your comment, Mary! I will post an updated software company valuation list. If you want to be notified, please sign up for the mailing list. Hi Mary! I am interested in the full list of companies in the data set. Would you please send this to me? Thank you. Hi Larry! Thanks for this valuable information!

When did you take this analysis? Also, can you provide a link to your next article with the full list? Thanks Eli! It was written in March I am working on updating this dataset and analysis this week since A LOT happened this year.

Hi Eli, here it is! Your email address will not be published. Notify me of follow-up comments by email.

Notify me of new posts by email. In this report we provide a statistical analysis of revenue multiples for public BioTech and Genomics companies as a means of comparison, given that multiples alone are not sufficient to substantiate a valuation.

Report : Tech, Trends and Valuation. Revenue multiples for Green Energy companies grew throughout all of , then stabilised around the 10x mark for Q1 and Q2 of Refreshingly simple financial insights to help your business soar. By submitting this form I give permission for Finerva to contact me.

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