Before I get into the actual valuation discussion, a couple of initial comments:
First, buyers want to purchase a growing and scalable business, so even though you are focused on a sale you need to keep your foot on the gas pedal; meaning run the business as if you aren’t planning on selling. Per my earlier comments in Part I, this process could take close to a year and the last thing you want to see is revenue and profits drifting downward. In fact, you will be rewarded if the buyer sees revenue and EBITDA trending up and to the right.
Secondly, selling is probably one of the most challenging and emotional things you will do – after all, it’s likely been your baby for years and there is a lot of emotion that goes along with creating, building and nurturing your business. The process is going to require stamina, fortitude, resilience and a level head. Take care of yourself physically because this process will drain you mentally, and what the professionals call “deal fatigue” is very real.
Buyers buy for a variety of reasons. I was personally surprised to see the variety of buyers that had an interest in our company. Below is a summation of what we saw buyers looking for:
- Round out offerings: Acquiring a complementary business to expand existing offerings;
- Customers/Focused Verticals: Accessing a new customer base or an industry vertical that they want to enter into, but don’t have that expertise;
- Geographic expansion: You both are similar, but you represent an area of the country where they want a footprint; and
- Human Capital: Adding resources that are hard to find.
Many times, the above reasons are more important than your revenue or EBITDA and buyers are more interested in a business based on its future potential and not past performance. Also, if there is a clear vision where 1 + 1 = a lot more than 2.
After selling two Microsoft technology companies I will tell you with certainty that Microsoft partners fall into four major categories and valuations in each category vary considerably. Here are the four major categories:
- Traditional VAR– sells software (perpetual or subscription). 90%+ of revenue is NON-recurring. (Annual software enhancements don’t count as recurring revenue.)
- VAR + Cloud or Managed Services Provider– This means you have 50%+ of recurring revenue, but it is not your own IP – meaning you resell someone else’s cloud (0365/D365/Intacct/NetSuite/Acumatica/SFDC/etc.) and provide implementation services around it.
- Hosted or SaaS Cloud Provider– 85%+ recurring revenue with some IP around the process of deploying, but it’s not your software that you are hosting, it is the vendor’s, but in your cloud (either public or private) that you maintain.
- SaaS Provider(Own IP) – 90%+ recurring revenue and it is IP that you own. This category includes ISV’s that have Apps or Vendors with their own solutions that work in tandem with an ERP/CRM system. Gross profits here will vary depending on if the cloud solution is bundled into your product or the customer has to procure their own, or in the case of D365, it is an APP that sits on Azure or AWS.
Below is a quick summary of my personal findings and I also collaborated with Dana Willmer from CloudSpeed.co, who recently conducted an analysis of valuations in the channel. Below is a quick chart to help you determine what your company MIGHT be worth. This assumes your revenues are under $25M. Valuations are considerably higher for companies greater than $25M.