Biggest BV driver in software company valuations

BVWireIssue #71-3
August 20, 2008 recently posted an article by Dave Kauppi (MidMarket Capital, Inc., Hinsdale, IL), which details the number one driver for business valuations in software and information technology companies: recurring revenue streams.  What counts is the timing of the initiatives taken to create contractually recurring revenue—implementing them prior to the sale will ramp up the company’s valuation, whereas no buyer will pay you for improvements they need to make themselves post acquisition. Dave writes, “On a value scale, contractually recurring revenue is a 10, expected historical revenue is a 6 and a sales pipeline is a 3. Move your 3’s and 6’s to 10’s and recognize a big boost in your business selling price.” 

Knowing this, it is important to take steps to maximize recurring revenue streams in order to secure a high business valuation.  This requires converting existing agreements to contractual agreements and giving customers incentives to add-on additional contractual services.  The company needs to rally its sales team behind this cause by creating commission plans that award a higher commission to recurring revenue contracts.  The sales team is key in ensuring a high valuation: “If a salesman’s lack of performance is costing you $50,000 in EBITDA and your company will sell at a 7 times multiple, this laggard will cost you $350,000 in transaction value.” Read all of Dave’s tips here.

Please let us know if you have any comments about this article or enhancements you would like to see.