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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
CPA, CA, CBV
Partner - Advisory Services
Mike has over 25 years of experience providing accounting and business advisory services, with a focus on the Canadian insurance industry.
CPA, CA, CBV
Alex Wong is a partner at Smythe Advisory and is focused on being a trusted business advisor to his clients.
CPA, CA, CBV
Director of Valuation Services
Paul Woodhouse focuses on providing financial advisory and litigation support services to clients.
Gagandeep specializes in M&A advisory engagements, as well as business valuations in the contexts of management buyouts and succession planning.
Arthur’s mandate is to assist Smythe clients in Western Canada in preparing for and executing business divestitures or acquisitions.