Negotiations of acquisition valuations for a technology or software company typically center on what “comparabables” or “comps” should be used. Valuations typically are arrived at by “triangulating” on a range of valuations determined via different methods. These methods typically include DCF (discounted cash flows) with terminal values calculated as a revenue multiple, EBITDA multiple, Earnings multiple, and/or perpetual growth (perpetuity).
The comparables are used to determine the appropriate multiples to use on Revenue, EBITDA, and earnings as well as the appropriate discount rate to use for the DCF. There are various comparables to be considered: “trading” (what are comparable companies valued at in the public markets) and “Acquisition” (what valuations have comparable companies been acquired).
Obviously, there are many other considerations that go into valuation (capital invested, cash position, desperation of buyer/seller, etc.) but comparables analysis is a good rule of thumb for valuations.