How to value a dev shop?
Suppose you run a small dev shop with 4 people (all software developers) and have been doing dev work for few clients. For one of these clients the dev shop dedicates about 70% of the time on billable hours. Now, the client is interested to acquire this dev shop and get all employees to join their company. Is there a way/method that can be used to figure out a value for the dev shop if it decides to sell and go work for that company? Assume 70% of the dev shop's revenue is generated from this client. Thanks
2 Answers
If he wants to buy the shop he wants to see the numbers - that is standard due diligence. He knows what he pays, he then knows the total income and headcount. They may succeed, but realize that - if the client makes 70% of their revenue they can say no, but then loose the client. That does not make the shop valuable.
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Since the acquirer represents the majority of revenue, the company is worth much less than its total revenue. – Scott Wilson 12 years ago
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Why do you assume they would lose the client if they choose not to sell to them or the offer isn't good? You make the same claim below. However, I have had customers who feel they are in the position of power because they do lots of business with us and then they want a rate cut, or whatever. I just say no... and they continue to do business with us. They don't go find other developers or fire us. The company wants to buy these developers to same money I would assume... but if they don't want to sell or the price is not right doesn't mean Steven loses his client. – Ryan Doom 12 years ago
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And If I want to buy them and am in a situation of power - I use that power to buy them. That simple. Now let me guess - you look for financing ;) Me not anymore. – Net Tecture 12 years ago
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I think our difference in perspective is the 'position of power' and the assumptions each of us are making. You are making the assumption Steven is screwed if he loses that client, or that he would lose the client should they not come to purchase terms. I assume Steven is competent, that the customer wants to do business with them no matter what. And even if he does lose that client that there is plenty of other business out there. In IT I have never had to beg or bend over backwards to acquire clients. Therefore, even at 70% I still say Steven controls his destiny, not this client. – Ryan Doom 12 years ago
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I feel there is some good conversation here, but Steven isn't chiming in at all. Has he been bought? has he gone out of business ;) is he too busy with other work? – Ryan Doom 12 years ago
I'm no evaluation expert but typically a small consulting shop is worth about what it brings in as revenue every year. So if you bring in $1,000,000 in revenue a year someone may be interested in acquiring you for $1,000,000 is you have good margins etc.
So if your revenue is say $500,000 and 70% is made up from a single client I would assume a purchase offer of 200k would be considered reasonable.
Hope that helps - the real answer is, it's worth what you would sell it for :]
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Sorr to -1 yo here, but in this case as a client I would offer him 3 months wages as finders fee or say bye and hire the fired employees. 4 people, 70% revenue from me - my game. – Net Tecture 13 years ago
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Well, I wouldn't assume the client necessary knows they make up that much of their business. None of my clients know that info. For all I know he is happy with his 4 man shop, and even without that client I have no reason to doubt he couldn't find other businesses to work with. So, when you tried to buy my company and I didn't like your offer I just say no. There is no reason my team would leave to go work for that company. The team just goes and does what it did before, and get other clients. **His client has no power or leverage over them** - if they are a competent team they will succeed – Ryan Doom 12 years ago
