Multiples are good. The median revenue multiple was 4.8x in Q2, up from 4.6x last quarter. The median has remained above 4x for 13 out of the past 15 quarters (in Q4 2016 it dipped to 3.8x). The 9 year median and average since Q2 2010 is 4.0x. About 1/3rd of companies sold for greater than 6.0x revenue, but those companies tend to have higher ARR ($50mm+).
In M&A, companies are often valued based on LTM revenue (last twelve months), not annualized recurring revenue or even forward revenue. SEG tries to push acquirers to apply multiples to these higher revenue figures, but it’s atypical. Depending on how fast you’re growing, there could be a big difference in value between 5x LTM revenue and 5x ARR.
Growth. In order to earn a premium multiple, strive for maintaining at least 40% year over year growth with at least 90% of that revenue coming from contracted recurring streams.
Qualitative Factors. Non-financial factors such as the age of the tech, strength of the team, and the uniqueness of the product all come into play. If your product is good enough, many acquirers will overlook major shortcomings on the financial side.
Hiring a great banker is critical to maximizing value in an M&A process, and banks like Software Equity Group are who you should look to.
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