When it comes to valuing your software company, it’s crucial to remember that your revenue is simply a number another number is multiplied by. That multiplier – the multiple – reflects much more than just your current financials. While it’s tempting to look at sector reports or public company multiples and make direct comparisons, this approach can be misleading.
Apples and Oranges
The multiple assigned to your company reflects strategic factors unique to your business, such as the quality of your revenue, the nature of your innovation, and your competitive edge. For instance, a company with high-quality recurring SaaS revenue may command a higher multiple than a firm dependent on less predictable transactional income. Similarly, businesses that demonstrate strong potential for growth, especially through innovative products or services, often secure higher multiples, as buyers recognize the future value those innovations can unlock.
It’s essential not to over-index on comparable transactions or assume that just because companies in your sector are getting a certain multiple, you will too. Public company multiples, for example, reflect very different dynamics, including market size, growth rate, and investor sentiment. Instead of focusing on sector-wide numbers, concentrate on what makes your company strategically valuable. The key is not just where your company fits in the market today but how it could accelerate a buyer’s growth or disrupt the competition tomorrow.
What’s your story?
While revenue is a critical factor, the multiple applied to that revenue is shaped by the strategic story behind it. Focusing on your unique value proposition—your innovation, team, and growth potential—will have a far greater impact on the multiple than merely comparing numbers with other companies in your sector. Focus on the strategic; that’s where real value lies.
