A prerequisite to understanding how to value your company and how to increase the value of your business is understanding how buyers think. This article will take you into the mind of a potential buyer of a technology or software company and provide you with an overview for why they make acquisitions and what is important to them when they are considering making an acquisition. Having knowledge regarding the underlying drivers of M&A activity in the technology marketplace is also helpful to accurately predict long-term trends within your industry and broader macroeconomic trends that may affect the value of your business. This knowledge can be used to manipulate the drivers of value for your company -- in other words, knowing what impacts the value of your company helps you maximize the value of your software, tech, or online business. It’s important to understand industry dynamics since that’s what drives acquisitions. There are two important things to take into consideration: Demand for Software: The demand for software in general will continue to increase, which will increase the overall volume of acquisitions. This will continue to make software companies attractive as acquisition candidates. The Cycle of Innovation: It is important to understand...

In a recent survey, Consumer Reports found that a “modern/updated kitchen” still rules when it comes to ideal home features among home buyers. When it comes to shoppers of tech, software, or other online businesses, recurring revenue is the most attractive enticement. And just as there are any number of other actions you can take to increase the value of a house -- finishing a basement and painting high-traffic areas come to mind -- there are steps you can take to enhance the value of your tech, software, or online business. These actions are called "value drivers," and in this article, we'll discuss the top ones. Specifically, we will: Introduce you to the theory and importance of value drivers. Outline the top drivers of value that can impact the value of your tech, software, SaaS, or online business. Identify specific steps you can take to improve the value of your business. What are you waiting for? Table of Contents An Introduction to Value Drivers An Important Note on the Range of Values A Note on General Preparedness for Technology Businesses Value Driver #1: Increase Recurring Revenue Value Driver #2: Document Comparable Transactions Value Driver #3: Prepare a Buyer List Value...

There are many factors to take into account when it comes to calculating the value of a company. The process gets even trickier if it’s a tech, software, or online business. The procedure for valuing any business is the same: calculate its SDE or EBITDA and then apply a multiple. In some cases, a tech business may be valued based on revenue. However, multiples are significantly different for tech, software, and online companies. And the factors that affect the multiples are different as well. Those considerations include: Scalability of the business Levels of risk and how they are addressed Recurring revenue Contracts The company’s growth rate The condition of the online code, and The cost to replicate the business. In the following article, you’ll learn about the various valuation processes and formulas, and the steps you can take to increase the value of any tech, software, or online company. Ready when you are ... Table of Contents The Valuation Process for Tech, Software & Online Businesses Valuation Formula for Tech, Software & Online Businesses Method #1: Multiple of EBITDA Method #2: Multiple of Revenue Deciding Which Method to Use EBITDA Multiples for Tech Businesses Factors that Affect the Multiple Factor...

What are the three most common mistakes business owners make when valuing their business? Valuation Trap #1: The Unnecessarily Complex Valuation Trap Most business appraisals are written for those involved in litigation or other legal matters. These appraisals use complex language that is difficult to understand and include methods that are of little practical relevance to a business owner wishing to sell. If you are selling your business and you want a valuation, is an appraisal right for you? If so, what type of appraisal should you get? Valuation Trap #2: The Third-Party Valuation Trap Several business appraisers offer their appraisals through a network of business brokers. These networks actively market their services to business brokers, charging as little as a few hundred dollars to the brokers, while the brokers may charge their clients what they please. Should you pay for a third-party appraisal? Valuation Trap #3: The Free Valuation Trap Why do business brokers offer free valuations? Should you trust an appraisal that you receive for free? The appraisal obviously plays a key role in determining the value of your business. That’s why it’s important to not waste time and money on unnecessary features and instead focus on what...

There are nine critical valuation concepts you should understand before valuing your business: Fair Market Value vs. Strategic Value Most business appraisals use fair market value (FMV) as the standard of value. Strategic value is the value of a business to a specific buyer. It can represent a value in excess of FMV to a specific buyer of a business, usually a strategic buyer. The primary downside to strategic value is that you cannot measure strategic value until you know who the buyer is, because every buyer is able to extract a different amount of value from the transaction. Should you use FMV or strategic value to appraise your business? Small Market vs. Middle Market The methods used to value a small business (less than $5 million in revenue) are different from those used to value a middle-market business (more than $5 million in revenue). Which method is right for your business? Business Valuation is a Range Concept The range of possible values for a business is wider than for other investments such as real estate. The M&A Market is Inefficient Some markets, such as the real estate market, have a ready supply of highly comparable transactions. The market for...

Getting divorced? Going bankrupt? Seeking a loan? Getting sued? Planning to sell your company? At some point, an event will likely occur during the time you own your business that will trigger the need for a business appraisal. Once you determine you need an appraisal, there are several important questions to ask yourself: Why is this being valued? When do I need it valued? What exactly is being valued? What type of appraisal do I need? The fact is all appraisals are not created equal. Valuations prepared for legal purposes -- such as taxes, legal disputes, and damage cases -- are affected by a complex array of federal and state laws and legal precedents which rarely impact the value of a business for M&A transactions in the real world. We can’t save your marriage but we can point you in the right direction when it comes to getting your business appraised in preparation for a sale. In the article that follows, we take an in depth look at each of the questions above. Table of Contents #1: Why am I Getting my Business Valued? The Purpose Determines the Methods Purposes and State Laws Purpose and Standard of Value Most Appraisals...

If you needed an operation, would you seek out a general practitioner or a surgeon who’s successfully done the procedure a thousand times? Yes, the GP might have a broad understanding of your medical issue and what it would take to get you on the mend, but when it comes to actually fixing what ails you -- whether it’s a hernia operation or a heart transplant -- it’s always best to use someone who’s been there before. Preferably, many times before. The same principle applies to getting your business valued and appraised. There are various types of appraisals but when it comes to selling businesses, we highly recommend that you use someone who’s got a successful track record of actually getting businesses sold. Preferably, lots of them. Here’s what we suggest: Tip #1: Use Methods Buyers Use in the Real-World When valuing your business for purposes of a sale, it makes sense to use valuation methods that are used in the real world by the types of buyers most likely to buy your business. Otherwise, your appraisal will be of little use to you. Tip #2: Hire Someone Who has Real-World Experience Selling Companies If you are planning the sale...

How do I maximize the value of my business? Start by making it appear less fungible. You can’t necessarily retool your product line overnight, but you can identify and promote specific aspects of your business that give you -- and the new owner -- an edge. Fungibility is the ability of individual units of a good or a commodity to be substituted for one another. Essentially, it means the goods are interchangeable. For example, one $10 bill is interchangeable with any other genuine $10 bill or with any combination of bills and coins that add up to $10. Fungible commodities include water, food, precious metals, and, possibly, your business. So, what does fungibility have to do with your company? In business, a fungible asset is one that can easily be substituted for another asset. For example, machinery may be considered a fungible asset in certain types of businesses. Labor may also be considered fungible in certain industries. In the world of mergers and acquisitions, a fungible business is one that can be easily substituted by the acquisition of another business. For example, if a buyer is purchasing a business solely for the cash flow it generates, then that buyer can...