Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER TWENTY-EIGHT
Valuing a Software Company
BRUCE D. MILNEQuick quiz: If you're selling a software company, what's the most important factor to consider? If you guessed price, you're in good company. You're also wrong. Thus, before we discuss the valuation of a software company, let's briefly address the differences inherent in the software industry, then we'll review valuation and structure of the deal.To begin with, when reviewing the chapters on the valuation of other traditional businesses (e.g. retail, distribution, medical practices, accounting firms), I'm stunned by how radically different the software industry is. Here are some quick comparisons to think about:
The balance sheet is crucial in the valuation of most businesses, whereas it's almost irrelevant in valuing software companies (other than excess assets or liabilities can adjust valuations).
Most business sales are financed by the bank or seller, which is almost never the case with software companies.
The Excess Earnings Method is critical in traditional company valuations, whereas it's never used in software valuations for strategic buyers.
Valuations of traditional companies are often only a fraction of gross revenues (.4-.6x), whereas software companies are often well over two times sales.
Most businesses use liquidation value as a valuation yardstick, not software companies.

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