Business Valuations for Software Companies
The software industry is constantly changing. Our experience with a wide variety of software models, business types, and verticals gives our business valuation professionals a unique advantage in developing a value for your company.
A skilled and experienced analyst will work with you to understand the specific nature of your business, the risks you face, and your unique value proposition in order to properly develop a fair market value.
Who We Work With
Over the years we’ve had a chance to work a truly wide variety of software development firms. Some of those include:
- SaaS developers
- Defense Contractors
- Analytics / Big Data
- Middleware developers
- Traditional software companies
- “Maturing” start-up companies
- Cloud Computing
Software Business Valuation Considerations
Our professionals will try to get an understanding of the “big picture” that drives your business, but some of the unique aspects in business valuations for software companies include:
- What is your revenue model? Monthly fees? Liscensing by CPU or server?
- What is your value proposition? Are you in a competitive segment or a unique niche?
- How big is your market? Are you highly nichey (and hence don’t have a lot of competition), but in a very small market? Or is your market big but with greater competition?
- Any patents? How are you controlling and protecting your IP?
- What is your sales platform? Do you have an active salesforce? Is business just internet driven? Sell through distributors?
- What are your re-occuring revenues?
Models We Consider with Software Firms
Typically we will rely on one (or more) of the following methods for our calculations. Each business and situation is different – Quantive will typically look to each of the below methods and determine which is most appropriate for the subject business.
- Asset Based Approach – While often not accurate for software firms, we still may look at this appraoch. What is the net worth of the physical assets of the business?
- Market Approach – How does the subject software company compare to those in similar segments?
- Income Approach – What is the value of the ongoing “benefit stream” of your company?
A Look at the Software Industry
The U.S. manufacturing base has undergone a drastic change over the last generation. Much of the heavy industry and lower value-add work has transitioned over shore, leaving behind more nimble and “high tech” manufacturers. The current manufacturing base is different:
- Worldwide software spending grew to $1.3 trillion in 2011, up nearly 6%
- U.S. enterprise market is approaching $230 billion annually (Gartner)
- SaaS and on-demand platforms are quickly changing the landscape
- The rise of “cloud computing” has opened up many new opportunities for vendors and developers
The net result of this growing- and changing- landscape is a need to innovate and stay ahead of industry changes. Firms that can take advantage of the current environment often tend to have a positively impacted valuation. Conversely, firms that fail to innovate and remain stuck in outdated business models are likely to see both their market and business valuation atrophe. Business valuations for software companies must take this changing landscape into account.