Many methods and ideas for valuing a fund. It is important to remember that a for the purposes of an exit is different than a intended to attract ongoing to the . float around the internet and in the business press. As a business broker who’s sold a few of these types of companies, I’ll share with you how I have been valuing in order to attract qualified buyers like a or a
For a fund, seeking to add incremental to their existing . For companies with under $10m, a typical will range from 1-5x. The factors used to determine where in the range of 1-5 a likely transaction would occur., a quick and easy way to arrive at a is to apply a multiple to the . This approach would be used by a strategic acquirer, like a or a
- – Faster results in a higher multiple.
- Percentage – The higher percentage of the higher multiple.
- Customer Churn – The lower the customer churn, the higher the multiple.
- (CAC) – The lower the , the higher the multiple.
- Positive , high and strong indicate the has nailed the product market fit and deserves a . –
Multiple of Discretionary
This of a is similar to the EBITDA multiple used for larger companies. In smaller companies, without a complete level of management, by a multiple of the economic received by the is most common with low and moderate . This method applies a multiple of 3-6x to the total reported income of the owner.
Multiple of EBITDA
In this method, typically used for larger companies with a management team and external EBITDA). The multiples can range from 3-15x with being the most important factor in determining wherein the range of multiples are used., a multiple is applied to the before Interest, Taxes, Depreciation and Amortization (
This method seeks to look at the minus the and determine a maximum of a based on the number of years to payback the the purchase price. This back of the envelope method seeks to quantify how much a would change with a 3-5 year payback period. While this is a rough estimate, it is helpful to estimate the of companies with quickly growing .
This method, commonly used with commercial real estate valuations is a quick method to determine business based on the cost of capital. It takes the annual and divides it by the cost of the capital expressed as a percentage. So if the is generating $1m/year in and the cost of capital is 20%, then the business is worth $5m ($1m / .20 = $5m).
Software Company Valuation Summary
An estimate of a company’s value is helpful in the planning phase of bringing a company to market. Once you’re in the market and start attracting offers from qualified buyers you learn the true value of your company.