Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Ask HN: Where can I buy real software companies?

news.ycombinator.com

Post reply on HN
Print view View original

31–40 of 171 posts

Re: Ask HN: Where can I buy real software companies?

#35

Post by log_n »

huhtenberg wrote: post #21
pmrd wrote: post #6

A $500k business would mean you'll end paying on average between $3-5 million for it. May I ask your rationale behind chasing these deals? Why not split the $3-5 million into risk-based chunks and invest in startups instead? You only need 1 of them to hit 50x.

I don't know why you are downvoted. The $500k/year business does , conservatively, cost $2-3 million (using the common "5x the yearly revenue" formula).

Valuing companies based on revenues is a bit of a stretch in my mind. Actual income/earnings/cashflow makes a lot more sense.

If you don't take into account expenses then you get some really wacky valuations: ie a company is in the business of selling houses (or other large cost item) for a small percentage higher than they bought them. If you don't take into account the cost of buying the house and running the business, and just look at the revenue from each house sale you will drastically over value the business. If they sell 50 $100,000 houses that they bought for $99k each and it cost them $500 in fees per house sale they would have $25k in actual earnings but $5 million in revenue. Valuing on a common "5x the yearly revenue" you would be willing to pay $25 million for a business that produces $25k per year (if you are willing to do so and have a lot of money I'll sell you a lot of businesses like that!).

Software is a higher margin business of course, but at the end of the day as an investor I care about how much cash is going to go into my pocket due to an investment rather than how much total cash passes through the companies books.

Even the 2x to 3x of earnings that sole proprietor/small software shops are getting now sounds outrageous to me. You're betting on growth (and paying like it's there) and hoping that clients don't leave for 2 to 3 years. Higher multiples can make sense if there are expenses you can cut to get earnings (or a very clear, easy to see growth opportunity [if that is there then why are they selling of course?]), otherwise you're just tossing away money.

Re: Ask HN: Where can I buy real software companies?

#39

Post by bdcravens »

huhtenberg wrote: post #21
pmrd wrote: post #6

A $500k business would mean you'll end paying on average between $3-5 million for it. May I ask your rationale behind chasing these deals? Why not split the $3-5 million into risk-based chunks and invest in startups instead? You only need 1 of them to hit 50x.

I don't know why you are downvoted. The $500k/year business does , conservatively, cost $2-3 million (using the common "5x the yearly revenue" formula).

It's a different story if staff doesn't come with, which many times for businesses this small, is just the founder.

Re: Ask HN: Where can I buy real software companies?

#40

Post by tobltobs »

bluedevil2k wrote: post #11
pmrd wrote: post #6

A $500k business would mean you'll end paying on average between $3-5 million for it. May I ask your rationale behind chasing these deals? Why not split the $3-5 million into risk-based chunks and invest in startups instead? You only need 1 of them to hit 50x.

I don't think that multiple is right - for a $500k rev software company, I wouldn't pay any more than 3x.

This 3x yearly earnings is mentioned quite often. But I can't believe anybody is selling for this. Maybe for 5x if you are in need of money. And in times of zero interest rates this 3x thing sounds even more unbelievable.
Post reply on HN