Valuation Multiples for Software Companies YTD 2012 – iMerge Advisors

By Michael Gravel

Valuation multiples for software companies continue to remain steady in comparison to the prior period ranging from 2.6 X to 3.8 X gross revenues. In translating those m&a multiples to the Gaussian bell curve above we can put that range in blue. Depending on the type of software company and its gross revenues will determine where that company specifically sits on the bell curve.

Valuation multiples for legacy software systems in which an upfront fee is collected with annual maintenance billing will tend to find themselves deep left of center (no political pun intended) in the 2.1% green shaded area of the bell curve in which EBITDA multiple valuation will be in the 3X range. These companies that do not have a cloud or SaaS solution to up-sell its existing customer base will find themselves being lumped into the “buggy whip” category. However, there is a cottage industry of buyers that are acquiring these software companies as annuity plays. In which sales, marketing, administration (SG&A) and development expenses are cut leaving an adequate support staff behind to keep the existing clients happy. Owners of these software companies may want to consider doing the same instead of selling.

As you move to the right of center on the bell curve you won’t find conservative entrepreneurs there. These are the “geeks in the garage” who have developed brand new technology that is a cloud based, software as service (SaaS) mobile application. The SaaS multiples of these companies can push into the beige area and beyond. In a review of nearly 100 transactions within the software sector since January of 2012, twenty percent (20%) were in the mobile space. For each Instagram that grabs the headlines there are many others that were sold like AisleBuyer (Intuit), HipLogic (Zynga), Kima Labs (Groupon) and Karma Science (Facebook). Although mobile acquisitions are currently white hot, nipping at the heels of mobile acquisition multiples in both SaaS multiples paid and acquisition popularity are cloud application providers such as just announced Buddy Media (Salesforce.com), Vitrue (Oracle), Drilling Info (Battery Ventures & others), Compliance360 (SAI Global), and DecisionView (IMS Health).

Lastly, cooling off back into the mid range of the bell curve, there were many software application acquisitions. To name a few BlueCoat Systems (2.8x revenues – Teachers Private Capital), Magna Design Automation (3.6x revenues – Synopsys) and 2nd Story Software (3.7x revenues – InfoSpace).

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