The fall is often a time that shareholders and directors give thought to their strategic plan for the coming year. Will they try to increase growth organically? Through acquisition? Or perhaps merging with a larger company that can provide the customer channels or resources is the best strategy?
For software firms with ageing applications, the choices are limited to continuing to live off the client base till the end of the software’s lifespan; to begin a redevelopment project; or to consider a strategic sale to a company in the same or an adjacent market who views your client portfolio as an opening into a new market or as a way to expand their current market.
For firms whose software offering is just taking off, getting to the next level of growth can be very difficult. Many smaller firms don’t have the sales and marketing resources (and sometimes skillsets) that a larger firm can offer them. A strategic sale to a larger company can provide this and help to propel them forward far more quickly than would be possible on their own.
For firms whose shareholders are thinking it might be time to monetize their equity, a strategic sale with a view to an eventual exit is an obvious move.
For firms considering a sale, the current market is looking very favourable. The software industry’s benchmark median exit valuation grew to a median multiple of 2.7x TTM (trailing twelve month) revenue in 2Q11. This is an increase from 2.3x TTM revenue in 1Q10.1
Following seven consecutive quarters of sub-2x median exit multiples in 2008 and 2009, 2Q11 marked the sixth consecutive quarter the median exit multiple equalled or exceeded 2.1x TTM revenue.
Before you go multiplying your current revenue by 2.7 to figure out your market value, bear in mind that these numbers are median values – ie: they are the mid-point of a wide range of exit valuations. Furthermore, exit valuations are rarely reported for private companies so these figures are based on the sales of very large public companies.
Having said that, what happens at the top of the market is usually reflected all the way through the market. As median exit multiples rise for large firms, so they rise for smaller, privately held companies.
If you’re wondering whether now might be a good time to consider a sale, this is an important point to take into consideration. When market conditions are good and exit multiples are strong, your company’s valuation will be positively impacted.