The 10 second "what is my company worth?" valuation.(Mergers, IPOs, and Venture Finance: Equities)(Professional standards)

Quick, you have 10 seconds: How much is your software company worth? Don't chuckle and tell me "a billion dollars." That just tells me you aren't serious. Also, if you are going to rely on statistics, make sure you pick them carefully, because I can tell you definitively that software companies have been selling recently for between zero and eight times times trailing revenue. The same multiple applies to headcount, and EBITDA. How helpful is that? Not very. However, there is a path to a useful answer. Let me take you down it.

First, who is asking? If it is a private equity firm, then we can step inside their constraints for a moment. Many recent private equity buyouts of profitable, growing software firms have happened at eight to 10 times trailing EBITDA. If the target has more than $10 million in EBITDA and stable, predictable cash flow, the multiple might climb through more aggressive use of leverage. Smaller companies pose higher risks and trade at lower multiples.

If your inquiry comes from a strategic buyer, what is their price/sales multiple? Assuming you are running at a similar profitability and growth profile, discount their multiple by 25% and you have a starting point. Bringing in some additional public companies trading in the same range will help bolster your confidence in a number. Of course you will be tempted to apply their earnings multiple ("they are trading at a PE of 80 and last year I earned $12.5 million on $17 million in revenue, so I'm worth a billion dollars!"), but the current earnings of a small, privately held software company is an unreliable metric. Chances are you are running extremely lean, with an extremely conservative risk profile. As a subsidiary of a public company you will staff up and invest in growth. Your earnings will look very different.

What if you are simply curious? You have an asset on your personal balance sheet and every day you work to increase its value. You don't have buyer and you aren't ready to sell, but you want to know what it is worth. You can start with five times EBITDA for EBITDA generated over the next twelve months. That gives you a number that reflects the intrinsic value of the company, without the benefit of synergies.

By Nat Burgess, Corum Group

Nat Burgess, executive vice president, Corum Group, 10500 NE Eighth St., Bellevue, Wash. 98004; 425/455-8281. E-mail: nburgess@corumgroup.com.

 Company/Description         Acquired by                    Price/Terms  Snowdrop Systems            Sage Group                     $33,500,000   * Human resources,        (SGGEF.PK)                     Terms: Cash     personnel and     payroll software  eCollege.com (ECLG)         Pearson(PSO)                  $477,000,000   * Online distance                                        Terms: Cash     learning  VoiceSignal Technologies    Nuance Comm. (NUAN)           $293,000,000   * Speech-enabled                                         Terms: Cash     mobile device     technologies  Agile Software (AGIL)       Oracle (ORCL)                 $495,000,000   * Product lifecycle                                      Terms: Cash     management  Company/Description                    Revenues               Multiple  Snowdrop Systems                    $14,800,000                   2.26   * Human resources,     personnel and     payroll software  eCollege.com (ECLG)                 $52,000,000                   9.17   * Online distance     learning  VoiceSignal Technologies            $40,000,000                   7.33   * Speech-enabled     mobile device     technologies  Agile Software (AGIL)              $130,000,000                   3.81   * Product lifecycle     management