| What business valuation would you place on a | | | | customer defections by announcing an actual upgrade |
| distribution management software company with $1.5 | | | | path versus years of promises5. Prevent a more |
| million in annual revenues and $500,000 in losses? How | | | | formidable competitor from getting his hands on this |
| about a healthcare software ASP with $300 K in | | | | technology and causing them some real damageThe |
| revenues that is breaking even? These companies | | | | good news is it worked and we were able to get our |
| don't exactly fit the 5 times EBITDA or the discounted | | | | sellers north of $2.5 million. Over a year later it has |
| cash flow valuation models.That is what makes | | | | proven to be a good deal for both buyer and |
| software or technology based companies so much | | | | seller.The healthcare ASP also turned out to be a |
| fun to sell. Arriving at a business value is done the old | | | | strategic fit for a much larger healthcare IT firm. This |
| fashion way. You identify the universe of likely buyers, | | | | established company had previously delivered their |
| prepare your blind profile and NDA, and contact the | | | | software through a traditional licensing approach |
| president or person in charge of mergers and | | | | where their clients managed their own internal |
| acquisitions. What you are trying to accomplish is to | | | | systems. The buyers needed our client's cutting edge |
| identify and articulate the strategic rationale for | | | | module that completed their suite of products. They |
| considering this acquisition.In the example above, our | | | | intend to use the ASP model as the springboard to |
| distribution management software company had | | | | launch their entire product suite on the ASP model to |
| adapted their software to a new vertical market while | | | | complement their licensing approach.Much of this |
| also introducing it on Microsoft's .NET platform and | | | | transaction value was in the form of a well structured |
| upgrading from green screen to GUI interfaces. They | | | | earn out. Both buyer and seller feel comfortable that |
| were not getting any traction in the new vertical | | | | the sales targets will be met and will provide the |
| competing against the two dominant players in that | | | | maximum contractual payment. This will result in a |
| space. They had, however, created a lot of value in | | | | value for the seller of about $2.5 million. The buyer's |
| their technology. They were a very good acquisition | | | | customer base of 1400 hospitals are prime candidates |
| candidate for one of the dominant competitors. They | | | | to upgrade their current software system (the buyer's |
| had "leap-frogged" this competitor with a more modern | | | | product of course) with this new capability. The seller |
| platform. The competitor, through a series of prior | | | | achieves a 20 times improvement in the sale of their |
| acquisitions, was actually supporting six different | | | | product as part of the large company. The large |
| software platforms for essentially the same capability. | | | | company increases revenues and uses a portion of |
| They were contemplating a long and expensive | | | | that revenue to complete the purchase price obligation. |
| system rewrite. They needed to consolidate platforms, | | | | It was accretive from day one.When it comes to |
| but did not have an upgrade path for their installed | | | | software or technology companies and business |
| clients. Their clients were vulnerable to defections.We | | | | valuation, beauty is in the eye of the beholder. If the |
| approached the president and positioned our client as | | | | company can identify the right buyers and if they can |
| follows:1. Purchase our client for a favorable buy | | | | be positioned as a strategic fit, traditional valuation |
| versus build outcome.2. Time to market - We could | | | | metrics may not apply.Dave Kauppi is a business |
| provide an immediate upgrade path versus eighteen | | | | broker and President of MidMarket Capital. We help |
| months of development3. Substantial cost savings - By | | | | business owners with all aspects of Mergers and |
| rationalizing their software platform and reducing the | | | | Acquisitions. |
| number of supported systems4. Immediately end | | | | |