Software M&A Valuations – Q2 2011

The following article is from Software Equity Group’s 2011 Q2 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here:

The software industry’s benchmark median exit valuation grew to a median multiple of 2.7x TTM revenue in 2Q11 from 2.3x TTM revenue in 1Q10 (Figure 29).

Following seven consecutive quarters of sub-2x median exit multiples in 2008 and 2009, 2Q11 marked the sixth consecutive quarter the median exit multiple equaled or exceeded 2.1x TTM revenue.  The last time we observed such a phenomenon was 2Q05 to 3Q06, during which we also reported a median software M&A multiple of 2.7x TTM revenue in 3Q06.  However, unlike in ’05-’06, the current median 2.7x exit multiple includes SaaS exits, which have unquestionably pushed the median software exit valuation higher.  Excluding these SaaS deals, the median software exit multiple is 2.5x.

Lest every software entrepreneur who reads this report multiply his/her company’s TTM revenue by 2.7 to determine current fair market value, we must emphasize that the 2Q11 median exit multiple for software and SaaS deals is simply that – a median – the midpoint of a very broad range of exit valuations.  Perhaps more useful is our calculation that in 2Q11, 36.9% of M&A deals with reported EV/Revenue exit multiples had a 2.0x EV/Revenue multiple or less.  By contrast, 21.0% of M&A deals with reported EV/Revenue exit multiples had a 5.0x EV/Revenue multiple or more (Figure 30).

Since very few software transactions publicly identify a private software seller’s TTM EBITDA, we lacked sufficient data to ascertain the median EBITDA exit multiple paid in 2Q11 for private software company sellers.  We did, however, determine 2Q11’s median exit multiple for public software company sellers was 14.7x TTM EBITDA, a healthy improvement over 1Q11’s 13.9x and 4Q10’s 12.4x TTM EBITDA exit multiple (Figure 31).

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