Click here to learn about Canada’s COVID-19 Economic Response Plan and support available for individuals and businesses
After going over the ins and outs of the asset-based approach in last week’s blog, our focus this week is exploring the market-based approach in the valuation of a software company.
The market-based approach derives its strength through its ability to consider actions of actual market participants. However, it is typically hard to find a truly comparable company given the uniqueness of each software company. There is often an additional layer of difficulty if comparable software companies are private, as these companies typically do not disclose much information to the public (e.g., financial data, terms of transactions, etc.).
That being said, a market-based approach will still be considered if there are any comparable companies found. This approach typically reviews the market valuation multiples involved in the particular transaction, such as EV/Revenue or EV/EBITDA.
In the assessment of the appropriate multiples for use in the valuation of the subject software company, one should consider some relevant factors, including:
We wish to note that the above list is not exhaustive, as there are many other factors to consider when deriving a suitable valuation multiple observed from the market. As such, careful consideration of the determined comparable companies is required, including whether the company is truly suitable in the valuation of the subject software company.
Next week, our blog series – The Valuation of Software Companies – will come to a close as we dive into our last segment on the earnings-based approach.
 Enterprise Value
 Earnings before interest, tax, depreciation and amortization