Yesterday I was talking to an entrepreneur about his small software company. After being in business for a number of years, and building a stable base of customers, the company has leveled off with a handful of employees and sub $1 million in revenues. Now, he feels it’s time to sell the business. Only, a small software company with no growth isn’t worth as much as he’d like, especially compared to the big multiples commonly referred to online.
Here are a few thoughts on valuing a small software company with no growth:
- Typical business valuation multiples apply with the most common being 4 – 6x profits
- Software companies with scale and a good customer base are typically valued at 2 – 3x revenue for installed software and 3 – 6x revenue for Software-as-a-Service with growth rate and profitability being two major drivers
- Strategic buyers pay more for a business than financial buyers, and it’ll be tough for either to get interested in a small business unless they want to significantly invest in it or it’s very complementary
I told him that if his passion isn’t in the business anymore, it’s time to move on. The valuation might not be want he wants but by selling it new opportunities will open up and he’ll have the chance to make the next one even greater.
What else? What are your thoughts on valuing a small software company with no growth?
David Cummings on Startups 