Aug 06 2007

Valuing a SaaS business

Last week, I briefly speculated on how you value an IT business, skimming across several alternative approaches before focusing on the ‘precedent’ approach in the context of UK construction collaboration software vendor 4Projects’ MBO. I did suggest being a Software-as-a-Service (SaaS) business might improve its valuation, but I didn’t know by how much. Over the weekend, however, I did a little research into industry ‘rules of thumb’ as they apply to software businesses and to SaaS companies in particular, and I may have seriously under-estimated the valuation of the business.

I have heard various commentators use revenue multiples to gauge the value of a conventional software business, and the figures normally appear to vary somewhere between 1.5x and 4x annual turnover depending on the type of business and its reputation, etc. But different valuation multiples appear to apply to SaaS businesses – as Chris Hoffman of TripleTree says (in Finding a SaaS exit): “Historical valuation metrics for traditional ISVs have changed and don’t apply to SaaS firms“. He continues:

“… SaaS has many inherent business attributes which differ from traditional software. A few of these are:

  • Platform extensibility and a more rapid achievement of business goals
  • A distribution model that simultaneously serves large and small clients
  • A single code base that helps keep costs predictable
  • A recurring revenue stream that rationalizes growth
  • Profit margin improvement as company scales

“… creating a premium valuation … requires more than financial performance … key qualitative attributes are at play. These metrics can add complexity to a valuation process, but will ultimately drive a multiple on revenue well above those captured by licensed software firms.”

This message is underlined in a TripleTree analysis, Software as a Service Update, which said:

“M&A transactions for Software as a Service businesses are trading at premium valuations. With the enterprise software sector consolidating 1x to 3x revenues, Software as a Service leaders have received premium valuations to their Software counterparts. Of the nearly 50 transactions that have occurred in Software as a Service, TripleTree has tracked valuations in excess (sometimes far in excess) of these figures.”

Of course, the key question is how much bigger is the multiple for SaaS businesses. Last year, Saugatuck Research noted:

“the price/sales valuation of Salesforce.com has averaged 1.5-2.5 times (or greater) that of enterprise software leaders Oracle and SAP for most of 2006. This reflects both Salesforce.com’s strong short- and long-term growth prospects as well as the highly renewable and predictable, cash-flow driven nature of the business.”

This is in line with the view of US merchant bank Mufson Howe Hunter & Co:

“valuations of companies with the Software-as-a-Service model averaged 3.8x EV/Revenues vs. 2.3x EV/Revenues for traditional software companies”

As an indication of how big the multiple could be, earlier this year, Cisco bought SaaS business WebEx at a price equivalent to roughly 7.6 times its revenues. I doubt that 4Projects would command such a premium, but it is highly likely that the valuation attached to 4Projects’ business was substantially more than I originally calculated based on the precedent of the 2003 Business Collaborator acquisition. So I wouldn’t be surprised if the valuation figure was somewhere north of £10m, maybe approaching even twice that figure if the private equity firm looked at something like the WebEx precedent….

Permanent link to this article: http://extranetevolution.com/2007/08/valuing-a-saas/

Aug 03 2007

Causeway acquires Elstree Computing

With my July holiday and the MBO at 4Projects, another event in the UK construction computing world almost slipped under my radar. Causeway Technologies (vendor of Causeway Collaboration) acquired Elstree Computing (ECL – with its own Information Manager document management and collaboration solution) last month (see Causeway news release).

“With over 2,000 customers and employing 150 people, the enlarged Causeway business is now the UK’s largest provider of software to the construction industry on every measure; employees, revenue, customers”, it claimed.

On a more personal note, I see the PR contact at Causeway was named as my friend Tim Nichols, formerly at RedSky IT (previously Ramesys).

Permanent link to this article: http://extranetevolution.com/2007/08/causeway-acquir/

Aug 03 2007

More on the 4Ps MBO

This week’s management buy-out of 4Projects was reported in north-east England newspaper The Journal this week.  The 1 August report, Wear IT specialist out to double its revenue, adds little to the news releases on 4Projects‘ and August Equity‘s websites, though it does revise last year’s turnover figure downwards by £200k to £3.2m from that previously reported in the press. It also includes some bullish statements from FD Steve Nelson:

“We now have the financial collateral to launch an aggressive expansion plan. We are looking to expand on three levels, internationally, vertically and product wise. We have a 100 day plan to work out which international markets could be the most lucrative to us.”

August Equity’s investment director Fraser Davidson said he expected 4Projects to double in size by 2009 following the buy-out:

“There’s a good opportunity to look at other markets including most of Europe, the Middle East and the US. We can’t take over the world but bit by bit it will grow internationally.”

04 September 2007 Update: A Businessweek webpage reports:

4Projects Ltd. announced expansion plans that will see scores of jobs created following a buyout. 4Projects has announced plans to move into new markets such as oil and gas, and to explore a range of international opportunities. The plans will mean the recruitment of new staff in all areas of the business, including internal and external sales and technical development.

Permanent link to this article: http://extranetevolution.com/2007/08/more-on-the-4ps/

Aug 02 2007

MBO at 4Projects (3)

So how much did the August-backed management team at 4Projects pay for the business (see previous post)? No figure was quoted in the release, and there are no hard and fast rules that we can apply.

Business valuation is something of a mixture of art and science, with several ways to estimate a fair price. For example, businesses might be valued based on:

  • a multiple of their earnings (EBIT)
  • enterprise value (net debt plus equity value)/sales (EV/sales)
  • assessments of their future cash flow
  • what it might cost to start-up an equivalent company from scratch
  • what it would cost to fund an acquisition through debt
  • the liquidation value of a business’s assets
  • by industry ‘rules of thumb’
  • precedent (ie: valuations applied to other companies operating in the same market)

If we apply the last approach, we could look back to when Business Collaborator was acquired by CODASciSys from Enviros Ltd in April 2003; the total consideration then was £2.82m cash. This was the value perceived for a business which at 31 December 2002, had a turnover of £1.3 million, an operating profit of £360,000, and net assets of approximately £100,000. In other words, its valuation represented approximately 2.2 times annual turnover (or 7.8 times its operating profit).

We could adopt a similar approach for 4Projects, based on what little has previously been revealed about its financial performance. I previously guess-timated 4Projects 2006 turnover as around £2.7m, while its 2007 turnover was quoted at £3.4m. Applying the BC precedent, based on turnover 4Projects could be valued at 2.2 x £2.7m (£5.94m) or 2.2 x £3.4m (£7.48m): let’s say in a range between £6m and £7.5m.

Of course, this is just one method; I expect most financial wizards would try several approaches, and there would then be further negotiation between the seller and buyer. Also, Business Collaborator is a subtly different business to 4Projects, not least insofar as 4Projects is more focused on delivering its products on a Software-as-a-Service (SaaS) or on-demand subscription basis, while BC provides customers with the option of self-hosting, paid by up-front licences – giving 4Projects greater visibility of a higher proportion of future revenues from ongoing client engagements. Adjusting our valuation to take account of this might nudge the £6-7.5m figure up a little further.

Permanent link to this article: http://extranetevolution.com/2007/08/mbo-at-4proje-1/

Aug 01 2007

MBO at 4Projects (2)

Not being a financial wizard, I have been doing some research on what is involved in a management buy-out, so that I understand the implications of yesterday’s 4Projects announcement better.

Wikipedia’s MBO entry yields some interesting background on private equity-backed MBOs:

“The private equity investors will invest money in return for a proportion of the shares in the company, though they may also grant a loan to the management. The exact financial structuring will depend on the backer’s desire to balance the risk with its return, with debt being less risky but less profitable than capital investment.

Although the management may not have resources to buy the company, private equity houses will require that the managers each make as large an investment as they can afford in order to ensure that the management are locked in by an overwhelming vested interest in the success of the company. It is common for the management re-mortgage their houses in order to acquire a small percentage of the company.

Private equity backers are likely to have somewhat different goals to the management. They generally aim to maximise their return and make an exit after 3-5 years while minimising risk to themselves, whereas the management rarely look beyond their careers at the company and will take a long-term view.

While certain aims do coincide – in particular the primary aim of profitability – certain tensions can arise. …. As a condition of their investment, the backers will also impose numerous terms on the management concerning the way that the company is run. The purpose is to ensure that the management run the company in a way that will maximise the returns during the term of the backers’ investment, whereas the management might have hoped to build the company for long-term gains. Though the two aims are not always incompatible, the management may feel restricted.

From the perspective of a UK competitor of 4Projects (I am, of course, employed by BIW Technologies), it will be interesting to see if this change of ownership structure leads to any major changes at 4Projects. Optimistically, I hope it might result in some more transparency in its financial reporting so that can at least compare its results with those of the other UK market players (including BIW, Business Collaborator and Asite), which report their figures more fully to Companies House (see previous post) – to date, we have relied on brief statements in the press to gauge 4Projects’ performance.

Permanent link to this article: http://extranetevolution.com/2007/08/mbo-at-4project/

Jul 31 2007

MBO at 4Projects

There has been a momentous announcement from UK construction collaboration technology vendor 4Projects today: 4Projects Holdings Ltd has been bought by its management team, led by MD Richard Vertigan and finance director Steve Nelson, with the support of a private equity firm, August Equity LLP.

4Projects was previously a subsidiary of the Leighton media group, whose chairman Paul Callaghan was also chairman of 4Projects. In a departing statement, Callaghan says: “No competitor operating in our sector would have been able to attract this level of investment” – a somewhat tendentious and ultimately meaningless claim as there is no mention in 4Projects’ news release of the value of the transaction (August Equity’s website simply says “MBO (undisclosed sum)“. The new chairman is Stephen Edwards, described as “an experienced practitioner in the SME software space”, “introduced” by August Equity.

4Projects now has over 50 employees, and says it has “enjoyed healthy and profitable growth since inception, with a revenue model that has risen, month on month, for over 6 years”. As well as Edwards, Vertigan and Nelson, the management team includes: marketing director Duncan Mactear, commercial director Bernie Callaghan, operations director Neil Jarvis and UK sales director Jason Warde.

According to its website, August Equity – until March 2006 known as Kleinwort Capital – was previously an investor in Ramesys, later renamed RedSky IT (sold in January 2007 to Explorer – see post).

Permanent link to this article: http://extranetevolution.com/2007/07/mbo-at-4project-2/

Jul 30 2007

e-Builder makes its “major announcement”

I wrote last month about US construction collaboration vendor e-Builder and its impending major announcement. I waited well into July to see what this would be, but nothing appeared on the e-Builder website until just over a week ago when a release finally appeared, backdated to 29 June.

e-Builder announced “the launch of e-Builder Enterprise 6.0, the next wave of on demand capital program management software”, aimed at owners and owner’s representatives for whom enterprise class systems were too expensive to purchase or manage. With Enterprise 6.0, e-Builder says it:

“delivers an integrated, customizable enterprise project management solution for companies of all sizes. Simply put, it’s easier to learn and can be implemented in days and weeks instead of months and years and requires a much lower cost and time investment than traditional systems.”

Given that some US vendors (eg: BricsNet, Autodesk Constructware, Meridian) already seem to offer enterprise class collaboration solutions, I am not sure this development will have the “resounding impact in the industry for years to come” that e-Builder promised. The company now offers three levels of product (within an over-arching Framework):

  • Enterprise – “an integrated capital program management solution …”
  • Collaborator – “a web-based document management and collaboration system for construction projects”
  • Professional – an “integrated document management and collaboration system for A/E/C professionals”

Permanent link to this article: http://extranetevolution.com/2007/07/e-builder-makes/

Jul 30 2007

Emap Construct titles to move?

Like some of my counterparts at rival UK construction collaboration vendors, I have enjoyed working with one-time marketing director (now strategy and development director) Ross Sturley and his colleagues at Emap Construct, publisher of trade papers Construction News, New Civil Engineer and Architects’ Journal (among others) and past organiser of ‘project extranet’ conferences.

I was therefore interested to read a weekend newspaper report in the Guardian suggesting that parent company Emap might be broken down and sold off, with magazines and events group United Business Media seen as a potential bidder for Emap’s business-to-business assets. Today, the same paper reports that private equity group Apax Partners could also be in the running with a £1.3 billion bid.

“Emap’s business-to-business unit, which incorporates its trade magazines and organises conferences and events, is seen as the group’s star division. It accounted for 32% of revenues and 45% of profits last year.”

If United Business Media was to bid, it would see Emap’s construction interests brought together alongside UBM subsidiary CMP, publisher of rival UK trade magazine Building and other journals, creating something approaching a monopoly of UK construction publications – with only Reed (home of Contract Journal) offering any real competition.

Permanent link to this article: http://extranetevolution.com/2007/07/emap-construct-2/

Jul 20 2007

More on email (and Newforma)

I am a keen reader of Lachmi Khemlani’s AECbytes newsletter, particularly for the insights into what is going on in the USA, and the latest issue is a good example.

Lachmi writes about attending ZweigWhite’s AEC Technologies Strategies conference, held in Las Vegas on 7-8 June. As well as some interesting case studies on building information modelling (BIM), Lachmi writes about implementation of “Project Execution Software” at Eppstein Uhen (a Wisconsin-based architect), and describes the challenge the firm faced in managing AEC project-related emails:

“Email in itself is a major challenge, as in the example of a Project Manager from the firm whose Email Inbox had over 4000 emails related to many different projects and other tasks. This email was not accessible to others and any email, received or sent, related to a specific project was not being documented with the project, unless the Project Manager specifically saved it out in the project folders. Even if this was diligently done, the sheer amount of information getting saved in project folders was turning them into a “digital landfill,” making it difficult to find required information easily and quickly and resolve issues efficiently. It was causing the staff at Eppstein Uhen Architects to spend a lot of time on non-value added tasks.”

The firm evaluated “document management applications” such as Documentum, Outlook plug-ins (eg: MessageSave), project extranets (eg: Buzzsaw and SharePoint), and project management solutions (eg: Primavera), but none proved a good fit:

“they were either too big or too small, or focused on a different market, they had a significant learning curve, and they lacked focus on AEC professional services and project based operations. Above all, they required a significant change in the way people were accustomed to working…”.

Of course, this AEC email challenge is nothing new – indeed, I returned to the topic only last month – but the firm’s dismissal of project extranets concerned me. While I cannot be sure which objection(s) is/are associated with each application, I wonder if Buzzsaw (targeted at AEC professionals for project-related work) was rejected because of a perceived learning curve or because people might need to change how they worked? (SharePoint is simply not a project extranet product and would require extensive configuration to meet the needs of an AEC team – see recent ShareWorkz post). And it appears the firm didn’t consider other, more sophisticated AEC-focused collaboration products (eg: in the US, e-builder, or Buzzsaw’s Autodesk stablemate Constructware). Also, the distinctive “digital landfill” claim set alarm bells ringing, reminding me of some provocative claims made last year….

Enter Newforma Project Center

Eppstein Uhen then looked at Newforma Project Center, said Lachmi, describing how it got an immediate “Eureka” reaction from project managers (mention of Newforma also confirmed my suspicions – see previous post!).

The Newforma application sits behind a company’s firewall: “a server … sits next to a firm’s central server and automatically indexes and categorizes all the information so that it can be easily accessed, managed, and searched” and “it has plug-ins to Microsoft Outlook that allow both incoming and outgoing emails to be quickly saved with their respective projects with a single click” (Lachmi promises a more detailed product review next month – which I look forward to).

Email integration

It is clear that email (and Microsoft Outlook in particular) remains widely used within AEC project teams, despite the availability of other email-like communication channels within some AEC collaboration products. For example:

  • the UK’s BIW Technologies [my employer] has long had a ‘team mail’ function within its collaboration platform that allows project team members to create, send, receive and – most importantly – track, store and provide an audit trail of email-like project-related communications,
  • and Union Square makes a virtue of the email management capabilities in its Workspace intranet platform (see post).

BIW has now gone a stage further and provides an Outlook Integration utility. BIW users can continue to use Outlook as their primary workplace tool, yet access BIW without needing to jump to a separate system.

  • from within Outlook, BIW users are notified of outstanding actions and alerted to new project information that has been sent to them
  • once logged into Outlook, users can click on a link to their BIW project and enter without needing to login
  • users can ‘drag and drop’ project-related emails onto a project folder and quickly upload the emails into BIW

Permanent link to this article: http://extranetevolution.com/2007/07/more-on-email-a/

Jul 20 2007

From SaaS to PaaS

Courtesy of Computer Business Review Online (also ASPnews.com), I read that on-demand vendor Salesforce.com‘s latest release will see its business platform evolve from software-as-a-service to platform-as-a-service, a step that will apparently “antagonize and incentivize big league players Microsoft, SAP, and Oracle”.

ASPnews.com also reports – see Software Plus Services Spurs Rapid Growth at Microsoft – that Microsoft is already gearing up to respond to the anticipated on-demand boom by building new data centres and software development complexes to support its Software-plus-Services strategy.

Tags: Software-as-a-Service SaaS Salesforce.com Microsoft on-demand PaaS

Permanent link to this article: http://extranetevolution.com/2007/07/from-saas-to-pa/

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