What's your rating of IIT
Practical tips for the company valuation of IT companies
| Especially for medium-sized IT entrepreneurs, tax consultants are the first address when they deal with the issue of succession and / or the acquisition or sale of a company. |
1. Occasions for evaluating IT companies
There are very different reasons for evaluating the IT company. These include, for example:
- Buying or selling companies, permanent establishments, business areas, product groups, brands or shares in companies
- Company mergers or divestments
- Equity investments by employees
- Entry of a new partner into an existing company
- Departure of a partner from the company
- Supplementary information for banks as part of credit checks
IT entrepreneurs often have the opinion that the success of their IT company corresponds to the company value - but this is not necessarily the case.
2. Missing assets make valuation difficult
The evaluation of IT companies has always been a problematic undertaking for tax consultants and management consultants. Unlike in other industries, IT companies generally have no assets. Valuation methods that have proven themselves in other industries, such as the discounted earnings method and DCF, fail if you want to apply them to IT companies.
While there are often rules of thumb for company valuation for tradespeople, tax consultants, doctors, etc., these are missing for the IT industry. This is because the IT industry knows very different business models and the markets are very diverse. IT companies can be divided into the following different groups:
- Industry software company (client-server solutions; hybrid provider, cloud solution)
- Software companies that create "functional software", e.g. B. CRM, archiving etc.
- Technical software for devices, machines or for IT control
- System houses (hardware, "third-party" software, managed services, cloud services, etc.)
- CAD software for a wide variety of industries
- Individual development software manufacturer / project company
The groups shown have very different value creation models and possibilities. Industry software company z. B. benefit in their value chain from license sales, ongoing maintenance income, possibly consulting, possibly training. Project companies usually only participate in income during the term of the project. When the project ends, it is necessary to either acquire a follow-up project from customers or from new customers, which means that the company has a functioning sales / marketing system.
2. Tips on individual aspects
In the following you will find some tips on individual aspects that can play a major role in a company valuation.
2.1 Tip 1 - Permanent income
Analyze the sales of the IT tenant. Maintenance income or permanent income are a "revenue guarantee" when the churn rate is low. Tax consultants could help their IT clients if they post sales revenues to separate accounts according to these criteria, thus making the analysis easier.
2.2 Tip 2 - value creation models
One can i. d. As a rule, do not assume permanent income, the more the added value is achieved through project, service or work contracts. Such companies are more dependent on the economy than z. B. Industry software company. This is also reflected in a lower rating.
2.3 Tip 3: customer dependency
Determine the customer dependency - more than 20% of the total turnover from a customer is unhealthy, there is an increased risk of failure. This factor is reflected in the purchase price. The larger the customer, the more difficult it is for them to change systems - depending on the level of use of the application, there is a small or high possibility of switching to a competitor. This point could increase the purchase price.
2.4 Tip 4: Technology - payment models
Examination of the technology used - is it "state of the art" or no longer? In general, one can say that switching to the cloud amounts to reprogramming the entire application, with considerable technical risks. This could have a negative effect on the purchase price.
Furthermore, the payment models are changing increasingly. This means that in the future there will be no license income and only the use of the application will be billed to the customer. Today around 25% p. a. from the former list purchase price.
The change in the payment models leads to considerable losses in sales in the first few years of introduction - depending on the degree of conversion. This fact must be taken into account in the company valuation.
2.5 Tip 5: company size
IT companies with a turnover of less than approx. EUR 5 million are of a so-called critical company size. This is the case because, due to the size of the company, not all functions can be filled by a responsible employee. Most of the time, the processes in this size of company are not well described or not at all.
The turnover of an IT company should correspond to at least the number of heads (full day) × 100 kEUR turnover (120 kEUR should be the "normal case"). With system houses, the head turnover is much higher and is "increased" by the external services and products.
2.6 Tip 6 - company valuation
In IT companies, this is usually used as an assessment Multiples method used. There are reference values for this from the magazine Finance, but these relate to companies with sales of more than EUR 50 million. The value is currently between 6.8 - 10. The adjusted EBITA is used as the multiplication value. The turnover multiples are usually not used in practice.
In the case of medium-sized IT companies with sales of less than EUR 5 million, a multiplication value of around 3 to 6 times the EBITA is currently assumed. System houses tend to be at the lower end, while industry software companies tend to be at the upper end of the scale.
When evaluating IT companies, it is essential that the “inner” values and the market environment flow into them before giving an evaluation to the client.
About the author | Andreas Barthel is a certified expert appointed by the Federal Association of IT Experts and Reviewers e.V. for the fields of: company valuation of IT companies and acquisitions, sales and succession planning. He heads the M&A specialist group at the Bundesverband IT-Mittelstand e.V. (BITMi). The author supports company acquisitions and sales in the IT sector as part of his consulting company: connexxa Services Europe Ltd. www.connexxa.de
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