In our 2017 Business Valuation Report, we analyzed the sales of over 300 companies for the year 2017 from 7 different categories of business. We found that out of all the different types of businesses sold in 2017, software companies are currently the most profitable type of business to sell in terms of multiple.
According to our data, software companies sold for an average of 3.16x multiple in 2017 – with the most profitable company selling at a 5.74x multiple.
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 136 software companies over the past 4 years to help high-value investors get a competitive edge when buying or selling software businesses in 2017
The average multiple of a software business sale is on a steady upward trend year-over-year:
Software businesses sold for an average of $784,000 between 2008-2017, with 2017 commanding the highest average multiple at 3.16x.
Now here’s the money stat (pun intended)…
2017 saw a huge jump in the total dollar amount of software businesses sold, from $26M in 2016 to $41M in 2017.
Again this is because the market has validated through the multiples that software businesses are more valuable compared to other categories, as well as an increase in the number of software transactions (26 in 2016, to 35 in 2017).
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
Here is a quick summary of how much software companies were worth in terms of multiples over the past 4 years:
- Average 2.37x multiple in 2014
- Average 2.77x multiple in 2015
- Average 2.90x multiple in 2016
- Average 3.16x multiple in 2017
This gives us an average of 2.80x multiple over the past 4 years. The below scatter graph shows the range of multiples on the high end at 8 times profit, at the low end 0.5 times profit, with the average sitting around 3 times profit.
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.
Here’s how business size impacted the valuation multiple over the past 4 years:
- In 2015, software businesses that generated $20k – $110k in net profit would fetch on average a 2.53x multiple. The businesses that did $115k – $600k in net profit would fetch 3.63x on average. Those were the two largest groupings for 2015 and they demonstrate the difference in multiple based on the profit size.
- 2016 brought a similar trend but with a more drastic contrast. The smaller profit businesses (again the $20k – $110k range) only averaged 1.92x. The medium-sized profit businesses (up to $600k) would sell for an average of 3.37x.
- Last year, 2017, the data corroborated the same finding but with higher multiples all around: 2.28x multiple for smaller profit businesses, 3.88x for medium profit businesses.
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. Here’s a quick look at how many of each business size sold between the years 2014 – 2017:
- In 2014, small-sized Software businesses were most common – with the bulk of these sales going to businesses generating less than $250k in sale price.
- 2015 saw about the same, with a few more deals selling in the $500k – $1M range.
- In 2016 we saw an overall dip in the number of software deals sold, but a couple more big sales in the multi millions.
- Last year in 2017 there was a much more even distribution of transactions, and overall a higher number of software sales (35 versus 26 the year prior).
So, if we look at a quick summary of the past 4 years in software business sales…
- These companies were valued at an average of 2.8x multiple
- They sold for an average of $870,000
- Software companies generated more than $112.5 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.