Business Valuation Case Study - Shareholders Dispute Software Firm

The Background:

This engagement involved a shareholder dispute of a prominent  software firm (the “Company”) that focused exclusively on subscription services to major car dealerships throughout North America. The Company’s list included eight of the top 10 automotive companies in North America. Due to a shareholder dispute, a co-founder, our client was offered a settlement for his minority shares of the Company.  Unfortunately, the shareholder agreement did not adequately cover the scenario surrounding the “business divorce”. All parties agreed to work in “good faith” once an independent valuation was performed on the Company in question as of the dated the Client left the Company.

An initial offer was submitted to our client. This preliminary offer was based upon the infamous EBITDA multiples.  Before accepting said offer and availing the Client of litigation, a business valuation was performed on the Company.

The Problem:

As stated above, in addition to having a minority position, no solid foundation for solution or valuation process in the shareholder agreement, and the Company’s significant deterioration of business after the co-founder (our client) left the Company. The original founders never anticipated the Company to grow to this size in such a very short period of five years. The Company was earning +$70 million in revenue and had a 12% EBITDA to Revenue ratio. 

Software has unique valuation criteria, this includes but is not limited to:

  • The debate as to whether a software company is valued base upon its revenue or EBITDA. The general guidelines for EBITDA vs. Revenue are:
    • Are revenues growing less that 50%+ YoY?
    • Does this business generate <$2M revenue per year?
    • If the answer is "yes" to any or all of the above, your software business, usually should be valued based upon earning (EBITDA); 
  • What is the life cycle of the solution;
  • What is the possible integration with other known solutions in this industry; 
  • Where is the product development with regards to cloud technology, mobile utilization and possible solutions outside the automotive market; and
  • Can a solid IP environment be created. 

Why LAG?

Lakelet had experience working with the client’s law firm in the past on complex business valuations.  Furthermore, one of Lakelet’s industries of expertise is software.  All parties agreed to the credentials and references presented by Lakelet.

The Solution:

This valuation was carried out using various methodologies, the relative factors being:

  • Comparable product offerings;
  • The market potential of the intangible asset; 
  • A change in alternative / competitive uses of the tangible asset; and 
  • An estimate of the intangible asset economic benefits. 

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Based upon LAG’s research, the nature of the services & technology and the information provided by the Company, our focus was on the Income and Market methodologies of valuation. From these results LAG determined a weighted average for the valuation of the Company.

Once an enterprise value was calculated for the Company, LAG determined the following:

  • Discount Rate (Risks)
  • A growth rate
  • Discount for the minority position
  • Discount for the lack of marketability

Finally, with the results from the selected valuation methods, LAG was able to reach a conclusion as to the value of the Client’s minority shares.

The Results:

Within two (2) weeks, Lakelet was able to present to the client and their team the valuation for the shares held given the economic parameters delineated above. The valuation was accepted by all parties and as a result, our client was able to obtain 50% premium over the initial offer.

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