Find 16 X 20 Blue Multi Purpose 6 Mil @ Amazon.com
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One of the most challenging distinct elements of selling a healthcare data engineering company is coming up with a business valuation. Sometimes the valuations provided by the market (translation – a finished transaction) defy all logic. In other industry segments there are a lot of gorgeous handy rules of thumb for valuation metrics. In one industry it may be 1 X Revenue, in another it could be 7.5 X EBITDA. Since it is critical to our business to aid our healthcare selective information technology clients maximize their business selling price, I have given this substantial thought. Why are some of these software company valuations so high? It is because of the profitability leverage of technology. A simple example is what is Microsoft’s incremental cost to manufacture the next copy of Office Professional? It is in all probability $1.20 for three CD’s and 80 cents for packaging. Let’s say the license cost is $400. The gross margin is north of 99%. That does not occur in devising or services or retail or most other industries. One problem in marketing a little healthcare engineering science company is that they do not have any of the brand name, distribution, or standards leverage that the huge companies possess. So, on their own, they cannot manufacture this profitability leverage. The acquiring company, however, does not want to compensate the little vendor for the post acquisition results that are directly attributable to the buyer’s market presence. This is what we refer to as the valuation gap. What we try to do is to help the buyer warrant paying a much higher price than a pre-acquisition financial valuation of the target company. In other words, we want to get strategic value for our seller. Below are the elements that we use in our analysis: 1. Cost for the buyer to write the code internally – Many years ago, Barry Boehm, in his book, Software Engineering Economics, devised a constructive cost model for projecting the programming costs for writing computer code. He called it the COCOMO model. It was rather elaborated and complex, but I have boiled it down and simplified it for our purposes. We have the vantage of estimating the “projects” retrospectively because we already know the number of lines of code comprising our client’s products. In usual terms he projected that it takes 3.6 person months to write one thousand SLOC (source lines of code). So if you looked at a senior software engineer at a $70,000 to a complete degree loaded compensation package writing a program with 15,000 SLOC, your calculation is as follows – 15 X 3.6 = 54 person months X $5,800 per month = $313,200 disunited by 15,000 = $20.88/SLOC. Before you guys with 1,000,000 million lines of code get too excessively affected emotionally in regards to your $20.88 million business value, there are various caveats. Unfortunately the market does not care and will not recompense for what it cost you to formulate your product. Secondly, this data is designed to aid us perceive what it might cost the buyer to develop it internally so that he starts his own build versus buy analysis. Thirdly, we have to apply discounts to this analysis if the software is three generations old bequest code, for example. In that case, it is discounted by 90%. You are no longer a engineering sale with high profitability leverage. They are fundamentally acquiring your client base and the valuation will not be that exciting. If, however, your application is a brand new application that has legs, begin sizing your yacht. Examples of this might be a click fraud application, Pay Pal, or Internet Telephony. The second high value platform would be where your software technology “leap frogs” a general bequest application. An example of this is when we sold a company that had altogether rewritten their bequest management platform in Microsoft.Net. They leap frogged the dominant player in that space that was supporting multiple second generation solutions. Our client became a compelling strategic acquisition. Fast forward one year and I listen the acquirer is syndication one of these $100,000 systems per week. Now that’s leverage! 2. Most acquirers could write the code themselves, but we suggest they make an analyzation of the cost of their time to market delay. Believe me, with firstborn mover vantage from a contender or, worse, client defections, there is a very real cost of not having your product today. We were capable to convince one buyer that they would be capable to warrant our seller’s entire buy price based on the number of client defections their acquisition would prevent. As it turned out, the buyer had a big install base and through multiple prior acquirements was preserving six disparate software platforms to deliver fundamentally the same functionality. This was very costly to maintain and they passed those costs on to their disgruntled install base. The buyer had been promising upgrades for a few years, but not one thing was delivered. Customers were beginning to sign on with their major competitor. Our pitch to the buyer was to make this acquisition, demonstrate to your client base that you are genuinely supplying an upgrade path and give detect of support withdrawal for 4 or 5 of the other platforms. The acquisition was finished and, even altho their clients that were contemplating leaving did not without delay upgrade, they did not defect either. Apparently the devil that you recognise is better than the devil you don’t in the world of healthcare selective information technology. 3. Another arrow in our valuation driving quiver for our venders is we restate historical financials using the pricing power of the brand name acquirer. We had one client that was a little healthcare IT company that had formulated a fine piece of software that equated favorably with a large, publicly swapped company’s solution. Our product had the same functionality, ease of use, and open systems platform, but there was one very essential difference. The end-user customer’s sensing of peril was far more outstanding with the little IT company that could be “out of business tomorrow.” We were in a literal sense competent to double the financial performance of our client on paper and present a compelling argument to the big company buyer that those economics would be without delay available to him post acquisition. It surely was not GAP Accounting, but it was effective as a tool to drive dealing value. 4. Financials are crucial so we have to recognise this aspect of buyer valuation as well. We in general like to build in a baseline value (before we commence adding the strategic value components) of 2 X contractually recurring revenue for the duration of the current year. So, for example, if the company has per month maintenance contracts of $100,000 times 12 months = $1.2 million X 2 = $2.4 million as a baseline company value component. Another factor we add is for any contracts that extend beyond one year. We take an estimate of the gross margin formulated in the firm contract years beyond year one and assign a 5 X multiple to that and discount it to present value. Let’s use an example where they had 4 years remaining on a services contract and the last 3 years were $200,000 per year in revenue with approximately 50% gross margin. We would take the final tree years of $100,000 annual gross margin and present value it at a 5% discount rate resulting in $265,616. This would be added to the earlier 2 X recurring year 1 revenue from above. Again, this financial analysis is to establish a baseline, before we pile on the strategic value components. 5. We try to assign values for miscellaneous sum totals that the marketer is providing to the buyer. Don’t overlook the strategic value of Blue Chip Accounts. Those accounts become a platform for the buyer’s entire product suite being sold post acquisition into an “installed account.” It is far requiring little effort to trade add-on apps and merchandise into an existent account than it is to open up that new account. These strategic accounts may have big value to a buyer. 6. Finally, we use a client acquisition cost model to drive value in the eyes of a potential buyer. Let’s say that your sales person at 100% of Quota earns total salary and commissions of $125,000 and sells 5 net new accounts. That would mean that your base client acquisition cost per account was $25,000. Add a 20% company overhead for the 85 accounts, for example, and the company value, using this methodology would be $2,550,000. 7. Our final valuation element is what we call the defensive factor. This is very real in the healthcare selective information engineering science arena. What is the value to a big firm of preventing his challenger from acquiring your engineering and bettering their competitory position in the marketplace. One of our clients had an outcomes database and nurse staffing software algorithm. The owner was the recognized expert in this area and had industry credibility. This was a little add on application to two big industry players’ integrated hospital apps suite. This module was viewed as providing a slight features vantage to the company that could integrate it with their main systems. The syndication price for one of these major software systems to a hospital chain was oftentimes more than $50 million. The value remunerated for our client was determined, not by the financial performance of our client, but by the competitory edge they could provide post acquisition. Our client did very well on her company sale. After reading this you may be saying to yourself, come on, this is a little far fetched. These parts do have real value, but that value is open to a wide interpretation by the marketplace. We are attempting to assign metrics to a very subjective set of components. The buyers are smart, and experienced in the M&A routine and rather frankly, they try to deflect these artistic approaches to driving up their financial outlay. The best leverage point we have is that those buyers recognise that we are presenting the same analysis to their challengers and they don’t know which factor or parts of value that we have staged will resonate with their competition. In the final analysis, we are just attempting to provide the buyers some reasonable comprehensible statement for their board of managing directors to warrant paying 8 X revenues for an acquisition. |
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