Software M&A: Valuation Models
The general rule of thumb for company valuations in the software industry is three times worldwide revenues. This general rule will vary based on the line of business. Term structure on software deals are generally negotiated from this starting point. Looking at how the companies generate cash is, in most instances, a great metric for measuring the value of a software company. In early stage deals, free cash flow are generally not as indicative of the eventual or potential growth of the company. In order to determine free cash flows from a forward-looking perspective, global worldwide revenues at 3X is the starting point. Other considerations include:
- Line of business
- Other public and private multiples
- Motivations for the business sale
If the acquirer is seeking a strategic target, the acquirer is nearly always the winner, regardless of the amount paid. This is especially true if the company integration between the acquirer and target is well-executed. However, the unfortunate part of the story is that finding a truly great example of a well-integrated acquisition is fairly rare.
“The agony of defeat lingers long after the smell of victory disappears.”
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