The Art & Science of Valuation

Software Equity Group is highly experienced and adept at valuing private software companies. Our assessment of the company’s fair market value utilizes a sophisticated financial model we have developed and continually evolved since 1995. Using both the income approach and the market approach, we typically utilize and integrate up to five different valuation methods, each incorporating the company’s historical financial data as well as credible financial projections. Since different methodologies are more or less appropriate for different types and stages of companies, we apply subjective weighting factors to each of the valuation methods in the combined valuation model, based on our opinion of their relevance and importance. A weighted average of the various valuation methods utilized is then calculated to arrive at our pre-adjustment fair market value range.

Fair market value can best be defined as what a ready, willing and able buyer would pay for a particular company or asset at a particular time and place. While fair market value is primarily a function of historical and projected finances in most industries, a host of other factors impact the fair market value of small and mid-cap software and technology companies. Buyer preferences, biases and prejudices, particularly concerning a small software company’s product functionality, technology, market focus, channel strategy and management team, all have considerable impact on the valuation of a private software or technology company. As a result, we also evaluate a host of qualitative factors specific to the Company, both positive (e.g., a SaaS model or considerably higher than average recurring revenue) and negative (e.g., software written in an outdated programming language or a line of disparate products targeted at unrelated markets). This process enables us to assess the likely impact on fair market value of these subjective, but sometimes preeminent factors, based on our experience negotiating hundreds of small and mid-cap M&A transactions with a plethora of buyers. A “below the line” adjustment factor is then applied to the results produced by SEG’s quantitative valuation model to reflect these subjective considerations and establish our final fair market value range for the company.

OUR VALUATION PROCESS

Software Equity Group employs a rigorous valuation process:

1.	Obtain detailed information about the company’s products, technology, distribution channels, target market, market opportunity, pricing, sales, marketing and financial performance, with specific attention to revenue growth, recurring revenue, margins, operating expenses and operating income.
2.	Research comparable public companies.
3.	Research comparable company merger and acquisition transactions.
4.	Meet with key officers to determine the Company’s future technology, product, sales and marketing strategy.
5.	Utilize and adjust as necessary our valuation model to determine the fair market value range of the Company, before any subjective adjustments.
6.	Assess the impact of qualitative factors specific to the company, both positive and negative, which buyers would likely consider in valuing the Company, and adjust the valuation model results.