In our 2016 Business Valuation Report we analyzed the sale of over 200 companies from 6 different types of businesses. We found that out of all the different types of businesses sold in 2016, software companies are currently the most profitable type of business to sell.
Here’s a quick summary of which types of business models are worth the most in today’s current market.
According to our data, software companies sold for an average of 2.87x multiple in 2016 – with the most profitable company selling at a massive 8.29x multiple in September of last year.
With a valuation like that – getting a great ROI is a no-brainer – and with this information, it’s easy to see that investing in the software niche is smart business.
If you’re interested in selling your software company, the real question is – how can you get the best possible rate for your high-value business? And for investors – how can you make sure you’re acquiring a guaranteed winner when you find a great deal?
At Digital Exits, our valuation and vetting processes are second to none. Thanks to our exceptional appraisal resources, buyers know we ONLY offer the highest-quality companies, and sellers know they’re listing at the best possible price for the current market.
We’ve leveraged those resources to help high-value investors get the information they need to gain an unfair advantage over the competition in the software niche. Here’s what we found:
We analyzed the sale of more than 100 software companies over the past 4 years to help high-value investors get a competitive edge when buying or selling software businesses in 2017
Here's what we found:
While the average valuation multiple dropped to 2.70x last year from 3.24x in 2015, the valuation is still trending upward from previous years.
Software businesses sold for an average of $667,000 between 2013-2016, with 2015 reigning supreme in Software profitability. Although 2016 saw a slight dip in Software business valuation from the previous year, it would be a mistake to think this niche is trending down. More than $29 million of the total transaction value over the past 4 years came from 2016 alone. That’s more than double the previous year!
Here’s a quick summary of the average Software business sales between 2013-2016:
- These types of companies were valued at an average of 2.77x multiple
- They sold for an average of $667,077 over the past 4 years
- The total transaction value of Software companies over these years was more than $131 million.
Now that we understand how the sale of Software companies performed on average, let’s dive deeper into how this market is trending over time.
Trends in Total Yearly Transaction Volume
You can see that 2015 was the peak for investing in Software companies – with total yearly transaction volume flying over the $80 million mark. This is a huge jump from previous years, with Software business sales simmering slowly at $6.9 million in 2013, and then leaping upward to $35.8 million the following year.
While last year didn’t hit the huge standard set in 2015, total yearly transaction volume held steady at almost $34.5 million in 2016.
This data shows us once again that every market has it’s ups and downs, but investors can rest assured knowing that there is still plenty of money to be made in Software today.
While it’s clear the transaction volume is obviously sufficient to support a healthy investing environment, let’s look closer at how the valuation of Software companies has changed each year.
Average Sales Multiples Per Year
If you’re unfamiliar with the term “multiple” – this metric refers to how much a business is worth. This is also known as the company’s valuation.
The value of a business is calculated by multiplying the amount of profit a business makes, by the valuation multiple:
$$ Profit amount x Multiple # = Appraised value of the business.
So if a Software company generates $350,000 in profit, and is estimated to sell at 2.5x multiple, then the business is predicted to sell for approximately $875,000
$350,000 x 2,5 = $875,000
After analyzing more than 100 Software companies that sold between 2013-2016, we can see that this type of business model peaked in 2015, where they were valued at 3.24x multiple on average.
Last year Software companies fetched an average valuation of 2.70x multiple, which is slightly lower than the previous 2 years, but still trending upward from the lowest valuation point in 2013.
Here’s a quick summary of how much Software companies were worth over the past 4 years:
- Average 2.56x multiple in 2013
- Average 2.86x multiple in 2014
- Average 3.24x multiple in 2015
- Average 2.70x multiple in 2016
This gives us our average of 2.77x multiple over the past 4 years.
It’s important to recognize that net profit isn’t the only factor in determining value. In fact, valuation is greatly impacted by the size of the business as well. Let’s look closer at whether small or large sized businesses are worth more in this market.
Are Smaller or Larger Software Businesses Worth More?
Let’s look at our multiple per sales price. This indicates how the size of a business impacts its valuation multiple. We can use this metric to determine whether large Software companies or smaller Software companies are worth more overall by analyzing what kind of multiples they are selling for based on income.
Here’s how business size impacted the valuation multiple over the past 4 years:
- Back in 2013, the highest-value Software businesses generated between $500,000 and $1 million. These companies were valued at 3.4x multiple on average. This is a huge jump in valuation from larger businesses. In fact, Software companies generating $1-2 million were valued at only 1.6x multiple that year.
- In 2014 larger businesses were more valuable – reaching peak value of 3.6x multiple in the $1-2 million range. This is a large contrast from the previous year, with mid-sized businesses generating $500,000-$1 million valued at only 2.5x multiple.
- 2015 brought a similar trend – with larger businesses becoming more valuable each year. At this stage, the bigger your business, the better – with companies generating over $1 million fetching a 3.79x valuation multiple.
- Last year in 2016 our “bigger is better” philosophy is supported even further. Companies bringing in more than $2 million are more valuable than ever – with an average multiple of 3.97x – the highest we’ve seen so far in this niche.
It’s clear that larger businesses are pulling in a much higher valuation multiple as an ongoing trend, but how many of those sales overall were from larger companies?
Let’s step away from value for a moment, and look at volume.
Total Amount of Software Companies Sold Each Year Based on Business Size.
Here’s a quick look at how many of each business size sold between 2013-2016:
- In 2013, small-sized Software businesses were most common – with the bulk of these sales going to businesses generating less than $500k.
- 2014 saw an even bigger volume of small Software companies sold. Most Software companies sold this year generated less than $500k, with almost 60% of those sales coming from small businesses bringing in less than $250k.
- In 2015 we saw a slight increase in business size. Most of the Software companies sold this particular year sat in the $500k – $1 million range.
- Last year was a fairly even split between small and mid-sized businesses. Most of the businesses sold were generating either less than $250k, or between $500k – $1 million.
Here’s how those sales were distributed:
If we look at a quick summary of the past 4 years in Software Business Sales…
- These companies were valued at an average of 2.77x multiple
- They sold for an average of $667,077
- Software companies generated more than $131.4 million in transaction value
Now that you know the numbers, how does your Software business stack up against the current market?
Here’s How to Sell Your Software Business in 2017
The process of selling your Software business will vary depending on the size of your company, but generally follows this straightforward procedure:
- Get a valuation of your business so you know what it’s worth
- Put together the prospectus (facts, figures and numbers about your business)
- List your business on a high-quality investment platform like Digital Exits
- Negotiate a price with potential buyers (or have an agent handle this for you)
- Conduct due diligence to verify the buyer’s financials
- Transfer all assets and money
- Help transition the new buyer into running your business
If you want to find out how much your business is worth right now, our dedicated team at Digital Exits can help.
With decades of experience in high-value business investments under our belts, our appraisal and vetting resources are unmatched in today’s market.
Where Can You Sell Your SoftwareBusiness?
Small Business Marketplaces – (under $100k)
Smaller business and micro-businesses are usually best sold privately by the owner through forums or classified websites.
To sell your small business, check out:
Broker – ($100k – $20m)
Medium sized businesses in the $100k-$20m are best sold through brokers who help with finding buyers, negotiating and structuring the deal. To sell your medium sized business, check out:
Investment Banks – ($20m +)
Larger businesses are best sold through investment banks or merger and acquisition companies. To sell your large business, check out:
- Founders Investment Banking – great if your business is making over $4m dollar profit per year.
We’ll help you get the most accurate valuation for your business, and match you with the best potential buyers in your niche.
Our speciality is connecting buyers and sellers in high-value transactions that represent only the absolute best companies on the market today. Buyers invest confidently knowing they’re getting the highest quality businesses, and sellers can relax knowing they’re listed among only the highest-value companies available.