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How much does a shareware company cost?

I have a small shareware company working in sales and development of domestic shareware. I actually have another job, but I began to work in this as a hobby, as a personal motivation. Now my circumstances have changed and I can't go on with this business. All the programms that I have devoloped have been very well accepted either by their own users and by specialized publications where these have been reviewed.

I suposse that, in order to value this company, I must give you some quantitative data about it. Away from exact numbers, but approximate, I could say that I have sold around 2000 licences and sells could be worth about 10.000 $ a year.

How much do you think this company is worth?

Regards from Spain,

spanish developer
Wednesday, June 11, 2003

Company valuation is a very subjective thing.  Expect to get lots of diverging answers.

As a starting point I would guess a company like yours might be worth as much as 2X revenues.  But other issues come into play:

It sounds like you are trying to sell the company.  That brings the valuation down quite a bit.  The highest sale prices happen when the motivation comes from the buyer not the seller.

You mention that you will no longer be involved.  This could bring the valuation down a lot.  What is the future of your product without your involvement?

So realistically, you may have trouble selling the company for 1X revenues.  It's possible you might get no offers at all.

Eric W. Sink
Wednesday, June 11, 2003

It's very difficult to estimate a value as it depends on so many things.

For example, what support do your existing users require? How much effort goes into maintaning the software? What potential is there for future sales?

If there is something really innovative about your software, someone might buy it to get that and use it in their own products. Other than that, it could be that the "valuation" is close to zero, it all depends if you can fund a buyer.

Steve Jones (UK)
Wednesday, June 11, 2003

I agree with the first two posters here.

My instinct is probably that you'd be lucky to get 1x revenue for it - considering you are the company and without you a lot of the value is lost.

Wednesday, June 11, 2003

As others have said, it's very arbitrary.

Rule of thumb valuation is one to three times revenue, and three to five times recurring income.

So, if your sales for the last year were 10K, and you get support of $1500, you're looking at $14,500 to $37,500.

Don't hold your breath for the 37K. You'd be lucky to get that at an economic high point, let alone coming out of a recession.

I'd expect between 10 and 15K.

Tim Sullivan
Wednesday, June 11, 2003

"coming out of a recession"

We are?

Wednesday, June 11, 2003

1-3x annual sales.

Wednesday, June 11, 2003

"We are?"

Depends on who you ask, how you define "recession", and how you define "coming out of".

IE- there is no right or wrong answer. Just decide which answer you want, then define the terms appropriately.

Congratulations - you are now sufficiently educated to begin a career in politics and religion.

Wednesday, June 11, 2003

There are a lot of ways of valuing your company, and choosing the right one depends who you are selling to.

An easy way to value your company is to discount the future cash flows.

You then get a net present value of the future cash flows, which is the value of the money today that the company is going to make in the future.

discount this by the risk premium and you have the value of your company.

simple example.... if you think that your company is going to earn positive cash flows (not revenues) of £1 000 every year for ever.

You also assume that the interest rate is going to be at 10% for ever.

The value of your company's cash flow is therefore £10 000.

In other words, you are asking the question, "How much money do I need to put in the bank to earn £1000 every year if the interest rates are 10%"

A risk premium would be attached to the investment, so someone might only be willing to pay £8 000.

This is a simplified model, but open any finance text book, and you will realise that the essence remains. The only difference is that the projected cash flows are different from year to year, and the expected interest rates will change too. You therefore plug in different values in an excel spreadsheet.

You ability to guesstimate these figures accurately tends to determine whether you make or lose money in the long run.

Wednesday, June 11, 2003

Another way to value the company might be the "what is it worth to you" method.

Assume your company makes product X
Potential Buyer (PB) makes product  Y.

PB might calculate that by bundling their product with yours, they can increase sales by x% and positive cash flows by £1000 per year.

Your product is therefore worth £1k per year to them.

They might decide that it could cost them £1.1k to develop an alternative.  As long as you price below £1k per year (which you discount using the method above) it is in their interests to make the purchase.

The fact that your +ve cashflow might have been zero is irrelevant.

Wednesday, June 11, 2003

Incidentally, this discounting of cash flows is what set off the dot com boom.....

Folk assumed that the company's would be making silly money in 5 years time...

Discounting these future EXPECTED cash flows gave silly valuations today.

When all woke up to the fact that these expected cashflows would never materialise, the game was up.

Wednesday, June 11, 2003

Ultimately, the value of your company is "whatever someone is willing to pay for it".

Thursday, June 12, 2003

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