Software valuation: license, subscription and services are three businesses
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Software companies are priced on the durability of their revenue, and the first question is what kind of revenue it is. A perpetual license sold once with maintenance afterwards, a subscription billed monthly, and implementation or support delivered by people are three different assets that often sit inside one set of accounts. A buyer separates them before doing anything else, and a seller who has not done that separation is negotiating about a blended number that means nothing to anybody.
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Software company valuation starts with unbundling the revenue
Split the top line into perpetual license, maintenance and support renewals, subscription, usage, and professional services. Each is priced differently: recurring contracted revenue carries the highest weight, maintenance streams are valued on renewal history, and services revenue delivered by employees is usually valued closer to a services business than to software. A single revenue figure hides the whole argument, and the buyer will unbundle it whether or not the seller has.
How to value a software company that sells licenses rather than subscriptions
A perpetual license business earns a large payment once and a smaller recurring one afterwards, so the questions become what the maintenance renewal rate is, how much of the installed base is on a current version, and what it would cost to move them if the product has to change. Buyers look hard at the age of the code and its dependencies here, because a large installed base on an old stack is a liability dressed as an asset.
Valuing tech companies on evidence rather than on category
The word technology covers businesses whose economics have nothing in common: a product company with recurring revenue, an agency billing for time, a reseller taking margin on somebody else's product. Diligence sorts them quickly by looking at gross margin and at who does the work. A seller who positions a services business as a product company gets one meeting out of it and a lower number afterwards.
What transfers, and what turns out not to
Ownership of the code, including anything written by contractors without a written assignment. Every open source component and the obligations its license carries. The customer contracts and whether they may be assigned. Data held about customers and the commitments made about it. Domain names, accounts and the keys to everything. These are the items that stop software transactions, and they take weeks to fix and minutes to discover.
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Software valuation: common questions
How to value a tech company with no recurring revenue?
On earnings, like any other business, with the multiple reflecting how repeatable the work is. A technology business without recurring revenue is a services business with better margins, and pricing it as software is the most common reason an owner's expectation and the market's answer are far apart.
Does the code itself carry value separately?
Rarely as a separate line, and often as a discount. Buyers price the code through what it costs to maintain and what it would cost to replace, so old dependencies, thin test coverage and a single developer who understands it are deductions. Documented, current and owned outright is what makes it neutral rather than positive.
How is a software company valuation affected by its customer concentration?
Heavily, and more than in most trades, because software contracts are often large and few. A business where a handful of accounts produce most of the revenue is priced on the risk that one leaves, which usually shows up as a lower multiple and a larger share of the price deferred against retention.
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