Most of us may take the impact of the software industry for granted, but according to sources, this one business sector contributes more to the U.S. economy than any manufacturing entity or business.
As a CPA or accounting professional, understanding the impact of the software industry is crucial to the delivery of consulting services for clients, customers or employers.
Two of the members of the Financial Consulting Group have compiled a special pricing study, "Software Industry Pricing: A Public Company Analysis" covering information on 328 software companies. The writers are James S. Rigby Jr., CPA/ABV, ASA and Michael J. Mattson, both of whom are with the Financial Valuation Group.
"From a practical, consulting point-of-view, this report provides the CPA with industry financial concepts and multiples so that the CPA can review a company both by size and the industry as a whole," says Rigby. "This includes various aspects, including revenue by employees, gross profit margins, and if they read it carefully, there are some surprises regarding the effect of size. Some of the multiples of small companies are counterintuitive in that they are higher than large companies."
The report analyzes the information based on company size and financial concept. Among other findings, the report states that:
- placing a value on a software company depends on an investor's personal expectations for that company and how confident the investor is regarding how the software will be accepted;
- the most important comparative concepts between software companies are the historical growth rates and expected future growth rates of earnings; and
- the key pricing multiples in valuing software companies are price to sales, price to EBIT (Earnings Before Interest and Taxes) and price-to-book multiples.
The report will be updated quarterly. Viewing the document will require the Adobe Acrobat Reader, available free from the Adobe Web site, or on the link below.