Calculating the value of a business can be done for several reasons. For starters, you may want to sell the company at the current market price. Secondly, you may want to buy business insurance to protect your company, so you’ll have to determine its value. Thirdly, you may want to offer a portion of the company through an IPO. Whatever the reason for selling, you must do a valuation.
What is My Software Company Worth?
Valuing a software company is not easy because most software companies do not have tangible assets that can be valued. Many of these firms only have a strong brand and a software product. Some firms may not even have revenue or profits, which can be used to value the business. This means that the valuation process can be more challenging than expected. The following are three methods of valuing software companies:
- Examining the Value of Similar Transactions
The easiest way to value a software company is to check the value of similar transactions. If a similar type of software company has recently been bought at a given price, you can value your software company at the same price or higher, depending on size, achievements, and financial forecasts. The shortcoming of using this method is that most private transactions are usually confidential, so you may not get accurate information.
- Recent Internal Share Sales
If you have recently offered employees a share of the company as payment for services rendered to the company, you can easily calculate the value of the company. For instance, if you offered 10% of company shares as payment for a year’s worth of software development services valued at $200k to your employees, you can value your company at $2 million.
- Price to Earnings Ratio
The P/E ratio of your software company can be used to calculate its value. Typically, a company is worth around 10 times the net income it generates annually. Calculate the annual income of the software company and subtract costs. The net income multiplied by 10 will give you an accurate valuation of your business. However, this multiple can be as little as 5 or as high as 50. Therefore, you should use your preferred multiple within this range depending on how valuable you think your company is.
The Best Approach
In addition to these three methods, there are many other business valuation methods. However, they are not all suitable for valuing software companies due to a lack of assets or even revenue. The best approach, therefore, is to use all these methods to get three different valuations. Make sure you use the higher valuation when negotiating prices with potential buyers.
It is important to note that if you have a unique software product or you’re offering a unique service, you may have difficulty valuing your business. For this reason, you should consult an expert in the industry. This will help to ensure you do not sell the business for peanuts when it’s worth much more than most software companies in the same industry.
How MergersCorp M&A International Can Help You
After spending years building your software company, you want to sell it at the best price possible. MergersCorp M&A International specializes in linking buyers and sellers of businesses both locally and internationally. This means that they’ll help you find a buyer who will pay the price you’re asking for.
MergersCorp M&A International is a prominent and experienced global advisory firm. It offers professional merger and acquisition advisory services to its global clients that want to buy or sell businesses. Their interests are protected in the deal with its professional support services. This team of M&A advisors, investment bankers, and brokers help companies that have $500,000 – $250 million annual revenues. You can visit MergersCorp.com for further information.
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