M&A VALUATIONS FOR IT COMPANIES (QUORA)
Answer by Nat Burgess:
Valuation methodology depends on the maturity of the business, the market segment, and the revenue model.
The first consideration is growth stage.
An early-stage, innovative startup that has developed new technology for a promising market will be valued based on the revenue opportunity they have created. That value can be expressed as discounted cash flow. It can also be expressed as replacement value times a “time to market” advantage derived from having the technology early in a market window. However, I have yet to find a reliable methodology for defending a time to market factor.
A mid-stage, high-growth IT company is often valued on a revenue multiple, because revenue is the best measure of their market penetration and growth, and profits are not yet important (assuming they are investing heavily in growth).
A mature company will be valued on EBITDA multiples.
Segment matters as well.
IT services companies are valued on EBITDA, scaling up or down based on growth, margin, customer concentration, predictability of revenue, and desirability of skills.
Revenue model also has an impact.
SaaS businesses are generally valued on top-line growth, because revenue in the current period represents only the tip of the revenue iceberg; the lifetime value of a SaaS customer is much bigger than the revenue they deliver today. The valuations of publicly traded SaaS companies move in lockstep with their top-line revenue growth.