Acquisition Multiples Paid For Technology, Internet & SaaS Businesses
“If I sell my business today what kind of acquisition multiples would be paid?” In one form or another, this is a question our clients all have. This article will break down the various acquisition multiples paid across a few of the more common technology sectors. For specifics please feel free to reach out to one of our advisors for a complimentary and confidential discussion about your business.
Software Technology business acquisition multiples of earnings (EBITDA)
3-5x multiples of EBITDA for non-recurring revenue models vs 5-9x multiples for recurring revenue models.
It’s important to note that recurring revenue software technology businesses valuations will be based on multiples of revenue. The multiples of ebitda and multiples of gross revenue result in the same total valuation. To better narrow down valuations within this sector, we need to further define and break down this vertical into two parts, one-time revenue vs subscriptions based revenue. For example lets look at two B2C eCommerce businesses that sell cheese, the cheese club of the month vs fine cheese selections. For the sake of discussion, lets put aside that these two should be both, an online retail store that also has cheese club of the month program. So why would higher acquisition multiples be paid for the cheese club of the month? Simply put, with all things equal including marketing spend rate, the cheese club of the month will be starting with a guaranteed amount of billable revenue on day 1 on the following month (less cancellations). Whereas the fine cheese selections website starts at $0 next month. Sellers like to point out that based on last month’s revenue, expectations are highly relevant that the new month’s revenues will be around or above last month, fair enough statement. Let’s look at this from a different angle which is the lifetime value of the customer. With the cheese club of the month we know the average program rate for its 1000 customers is $29.00 per month with the average customer staying a member for 8.5 months, a lifetime value of ($29.00 x 8.5 = $246.50/each). For the fine cheese selections store the average order is $59.00 with an expectation of 491 orders for the month ($29,000 in revenue). We also know that on average 25% of customers (5892 orders/yr * 25% = 1473) will place two more orders in the next 8.5 months ($59.00 x 3 x 1473/12 x 8.5= $184.68/each). Additionally, if marketing and SEO were to be turned off the last day of the month, the fine cheese selections website would get about 122 repeat orders (following month) or $7198 in revenues whereas the cheese club of the month would see renewal billings (assume 10% attrition) or $26,100 in revenues. Therefore valuations paid on subscription models will likely be in the 2x gross revenues or 4-5 x EBITDA. For the traditional product-based e-commerce business multiples paid will be 3-5x EBITDA not including any inventory.
SaaS or cloud computing acquisition multiples of earnings
Like subscription sites,is based on a multiple of revenues. There is a separate post on valuations paid in this sector and comparatives listed. To learn more please browse over to that post. If you would like to get into the specifics for your business and current market conditions please do not hesitate to contact us at iMerge Advisors.