Recurring Revenue Commands a Premium Business Sale Price (a short video)
Clidk Here to Watch Our Short Video The Key to driving strategic value in the sale of a technology company is to move buyers up from their starting price based on a conservative Cash Flow multiple. As a seller, you must first earn your strategic value
by building a great company. In your business sale, that must be captured and articulated in a competitive M&A process in order to unleash your optimized selling price. In this series of videos we will present 7 factors that we use to drive maximum strategic value.
Financials are important so we have to acknowledge this aspect of buyer valuation as well. We generally like to build in a baseline EBITDA Multiple value as our starting point. The market highly values contractually recurring revenue and that is demonstrated by the majority of software companies moving to a SaaS model.
Contractually Recurring Revenue is valued so much more than what we might call historically recurring revenue which would be projected new sales at a level consistent with prior years sales. Contractually Recurring Revenue reduces the buyer's risk in a transaction, thus increasing the value of the acquisition target.
It would not be unusual for a buyer to value a software company at 2 X contractually recurring revenue. So, for example, if the company has monthly software license contracts of $300,000 times 12 months = $3.6 million X 2 = $7.2 million as a baseline Company Value. If the company had EBITDA of $1 million, the buyer's starting position might be $5 million.
In evaluating this potential acquisition against a similar software company that had the same $1 million in EBITDA but only $2 million in contractually recurring revenue the post acquisition risk is much higher for the buyer and thus the purchase price will tend to be lower and the amount of cash at closing will also trend downward.
In our first example with higher recurring revenue the value will move upward from the 5 X EBITDA value baseline. Also, the seller will be rewarded with a much larger cash at closing component.
Again, this contractually recurring revenue analysis is to establish a higher initial financial baseline, before we pile on our additional strategic value components.
We want the buyer to consider the potential value creation of your assets in their hands post acquisition and to base their price on this view, not a 5 X multiple of EBITDA. Sometimes it may be difficult to stir up much strategic value and your buyers are going to stick closer to a financial multiple. At the very least, we look to move our clients to the top end of the range for an EBITDA multiple. So if the range were between 5 X
and 6.25 X EBITDA and your EBITDA were $1 million, getting you to the top of the range could mean an additional $1.25 million or a 25% improvement.
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Until next time!
Dave Kauppi is the author of "Selling Your Software Company - an Insider's Guide to Achieving Strategic Value, editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital, Inc. MMC is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and Letter of Intent Consulting. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (269)231-5772, email Dave Kauppi or visit our Web page MidMarket Capital. Click Here For Our New Book on Amazon