Valuation data for US based tech companies indicates a strong market across the board, but a few types of business models stand out.
Looking back over the past two years, we see a wide range of exit multiples (price divided by annual sales). For technology companies, the highest multiples were awarded to Prepackaged Software, followed by Computer Processing / Data Preparation, and Computer Programming Services. The chart below ranks seven categories.
Looking further down the income statement at EBITDA multiples (earnings before interest taxes depreciation and amortization), Prepackaged Software is still the leader at 28x, while Computer Facilities Management Services (11.0x) and Information Retrieval Services (10.7x) move up to second and third.
What is driving the increased value for the top categories?
- Opportunity. How big is the target market and how fast is it growing? The most valuable prepackaged software companies provide a method for improving efficiencies, visibility, and scaling revenue within an existing sector of the economy (property management), or they improve upon a recurring function applicable to most or all sectors (business intelligence or sales execution).
- Scalability. Does the business model handle accelerating volumes with reasonable or modest incremental investment? Is it a cloud-based software as a service (SaaS) platform that efficiently plugs into and communicates with the existing company’s digital infrastructure?
- Management Teams. How effective is the company’s vision, leadership, culture and execution? Did the company build a cohesive high-performing team with low turnover and a strong track record? The best teams produce the highest valuations.
When building a tech company, focus on the business models that add the most value and that solve an existing problem. Within a business category, gear the plan towards the most opportunity, enable processes with the greatest scalability, and hire and retain the best management teams. With a ton of hard work and a little luck, success is sure to follow.
About the Author: Jeff O’Brien is President and Founder of Fusion Finance, a business valuation and M&A advisory firm focused on the technology, media and telecommunications sectors. Learn more at fusionfinance.com.
Note: the transaction data in this article is provided by DealStats, 2018 (Portland, OR: Business Valuation Resources, LLC). Used with permission. DealStats is available at www.bvresources.com/dealstats.