Business valuation for software app developers

Why value a software development company? The short answer: because these businesses tend to create a lot of value.

Just think about it: where would the world be today without all the software apps? Technology  moves at a dizzying pace. So new and sometimes even useful software apps pop up seemingly every minute.

Software everywhere

Whether you are using a smartphone, enjoying a moment doodling on a tablet, or hunker down to some serious work on a laptop or desktop, software tools are ready to spring into action.

Software apps rule in a connected world

In a connected world, software is what makes it possible for people to collaborate effectively or just share across the Web. Countless software experts work tirelessly to build the next big thing. The most valuable companies today would not be here without all the software apps.

So what are the numbers behind the software industry these days? Here are some highlights:

In the USA alone, there are some 8,848 software publishing companies, classified under the NAICS code 51121. The industry sector as a whole generates the annual sales of over $171B employing over 410,700 software development professionals and staff.

The software industry produces a very respectable $416,000 in revenue per employee. Moreover, the software companies pay pretty well – the average payroll per employee is a cool $134,814. Ever wonder why so many talented young people jump at the opportunity to get involved?

An average software app development business produces about $19.4M in annual revenues with a staff of 46. That’s still small business but with a whopping growth upside.

Where do the software app developers hang out?

Looking to join a fast growing software company in your neck of the woods? Consider the highest concentration hubs of these businesses: California and Washington. No surprises there given the presence in these areas of the software industry titans like Microsoft and Oracle. But there are also sizable pockets of software development activity in Utah, Colorado, Texas, Florida and the North East. Not to mention that many of the software companies are global and have development centers all over the world.

Business valuation for software app developers

Constant innovation is the name of the game in software so being an established competitor does not ensure survival unless your company is on the lookout for new opportunities and, yes, emerging threats.

As a result, software companies often change hands, either being acquired by well funded industry bellwethers or merging with other hopefuls to boost growth. You can use the recent business selling prices to figure out the market values for similar firms.

The ratios that relate the business selling prices to their financial performance are called valuation multiples. You can use the multiples to calculate the value of your own software company, a highly defensible way to estimate what your company is worth on the market. Price to gross annual revenue is the valuation multiple typically used in such value estimation.

Example of valuing a software app development company

As an example, consider a typical software firm with $20 million in yearly sales. We next pick a set of statistically derived valuation multiples and calculate these business value results:

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