Why software, subscribers, data, talent and strategic synergies can matter as much as current earnings in technology firm valuations
Traditional business valuation is well-trodden terrain: earnings, cash flows and market multiples. Yet in technology M&A, particularly for younger or rapidly growing businesses, these measures may provide an incomplete picture of what a buyer is actually paying for.
A loss-making technology company can still command a substantial acquisition price. The explanation may lie in assets and capabilities that are only imperfectly reflected in current earnings: software that would take years to develop internally, a valuable subscriber base, proprietary data, a scarce development team, or access to a market that complements the buyer’s existing business.
This does not mean abandoning conventional valuation. Rather, technology valuation may benefit from an EBITDA+ approach: starting with financial valuation and supplementing it with sector-specific metrics, strategic synergies and the economics of alternative ways of obtaining the same capabilities.
1. Start with the conventional valuation — but understand its limitations
Suppose an illustrative Dutch software company, TechFuture BV, has:
- €4 million of annual revenue, of which €3 million is recurring;
- 30,000 users;
- annual revenue growth of 25% over the last two years;
- proprietary software developed over several years;
- a team of ten experienced developers; and
- EBITDA of minus €500,000 as it continues investing in growth.
An EBITDA multiple is difficult to apply meaningfully when EBITDA is negative.
A discounted cash flow (DCF) analysis can still be used. However, valuing a young technology company this way can depend heavily on assumptions about future growth and the likelihood of the often-assumed “hockey-stick” trajectory. Small changes to financial assumptions can result in large changes in estimated value.
Yet a strategic buyer might still attribute substantial value to TechFuture BV. Understanding why requires looking underneath the income statement.
2. What is the buyer actually acquiring?
Technology businesses can contain significant sources of economic value that are only imperfectly visible in current earnings or on the balance sheet.
For TechFuture BV, a buyer might principally be interested in five things.
| Asset or capability | Questions relevant to value |
|---|---|
| 1. Software, code and technology | How differentiated is the technology? How long would it take to recreate? What further investment is required? How quickly could it become obsolete? |
| 2. Customers and subscribers | How many are active and paying? What are retention, churn and net revenue retention? How concentrated is the customer base? What does it cost to acquire an equivalent customer? |
| 3. Data and intelligence | Is the dataset unique? Can it be replicated? How does it improve products, pricing or customer insight? What rights does the company have to use it? |
| 4. People and development capability | How scarce are the skills? How dependent is the technology on particular individuals? Could the team be retained following an acquisition? |
| 5. Market position and ecosystem | Does the business provide distribution, integrations, partnerships, network effects or access to customers that would otherwise be difficult to obtain? |
There can be considerable overlap here. The value of a subscriber base, for example, should ultimately be reflected in the cash flows generated by those subscribers.
These are therefore better understood as lenses through which to understand value, rather than five separate assets whose calculated values can simply be added together.
3. Tech metrics: choosing and explaining the right multiple
Where EBITDA is not particularly informative, market evidence can sometimes be expressed against other measures.
For a subscription software business, for example, enterprise value might be compared with revenue or Annual Recurring Revenue (ARR).
But the multiple itself tells only part of the story. Its appropriate level may depend on metrics such as:
- revenue and ARR growth;
- gross margin;
- Net Revenue Retention (NRR);
- customer churn;
- customer acquisition economics;
- customer lifetime value; and
- customer concentration.
Two technology companies with €3 million of ARR should not necessarily command the same ARR multiple.
A company growing at 30%, with strong retention and a diversified customer base, has very different economics from one with stagnant revenues, high churn and substantial customer concentration.
For another technology business, the relevant metric might instead be active users, transaction volumes, installed devices, contracts or another measure closely connected to future economic benefits.
Comparable transactions can then provide evidence of what buyers have paid relative to these metrics.
The important principle is that the metric should follow the economics of the business, rather than the valuation following whichever technology multiple happens to be fashionable.
4. Strategic value: What is the business worth to this particular buyer?
The analysis becomes more tailored in a strategic acquisition.
A company’s standalone value and its value to a particular acquirer need not be the same.
Suppose TechFuture’s 30,000 subscribers currently spend an average of €100 per year. A potential acquirer believes it could cross-sell one of its existing products to 20% of these subscribers at €150 per year.
That represents:
30,000 subscribers × 20% × €150 = €900,000 of potential additional annual revenue.
Of course, €900,000 of potential revenue is not €900,000 of value. The buyer would need to model margins, implementation costs, timing, customer response and the probability of achieving the expected cross-sell. The resulting risk-adjusted incremental cash flows can provide an indication of the synergy value available to that particular buyer.
The same principle can apply elsewhere.
Acquiring TechFuture’s technology might allow a buyer to launch a new product two years earlier. Its proprietary data might improve pricing or customer targeting across a much larger existing business. Combining infrastructure could create cost savings. An established buyer might also be able to distribute TechFuture’s technology internationally through channels the company could not easily access on its own.
Different buyers can therefore rationally place different values on exactly the same technology company.
5. Best alternative: What would obtaining the capabilities another way cost?
There is another useful question:
If we do not acquire this company, what would it take to obtain the same capabilities another way?
For TechFuture BV, an acquirer could potentially:
- recruit its own development team;
- build comparable software internally;
- license technology from another provider;
- acquire or license comparable data;
- spend to acquire an equivalent customer or subscriber base;
- establish a commercial partnership; or
- acquire another company.
This provides a build, buy or partner perspective on the acquisition.
Importantly, replacement cost should not be reduced to the salary cost of ten developers.
If recruiting the team takes six months and developing an equivalent platform takes another two years, the economic cost also includes recruitment costs, development failures, management attention, execution risk and — potentially most importantly — the opportunity cost of reaching the market two years later.
For fast-moving technology markets, time itself can have considerable value.
An acquisition that appears expensive relative to the target’s current earnings may look quite different when compared with the cost, risk and delay involved in recreating what is being acquired.
6. Technology assets have distinct ESG risks
Understanding these sources of value also helps identify where ESG considerations can become financially material.
The relevant cases are those where environmental, social or governance factors affect the durability, transferability or monetisation of the assets being acquired.
Data assets provide a straightforward example. A proprietary customer dataset may appear highly valuable, but that value depends partly on how the data was collected, the permissions attached to it, cybersecurity, privacy requirements and whether the acquirer can legally use the data for its intended purpose.
The same lens can be applied elsewhere. The value of software or AI may depend on intellectual-property ownership, open-source dependencies, cybersecurity and emerging regulation. The value attributed to a development team may depend on retention and key-person concentration. Environmental factors may also become relevant where a business model depends heavily on energy-intensive computing infrastructure.
The point is not to apply a generic ESG score. It is to identify ESG factors that affect expected cash flows, useful life, transferability or risk of the technology assets being valued.
7. Recapping the value lenses
The different approaches can produce quite different indications of value.
Consider a simplified analysis of TechFuture BV:
| Valuation lens | Illustrative indication |
|---|---|
| Standalone financial value (DCF) | €6m |
| Replacement/build economics | €8m |
| Comparable transaction evidence (tech multiples) | €8–11m |
| Strategic value to Buyer A | €12m |
| Strategic value to Buyer B | €16m |
At first glance, that is quite a wide range when it comes to predicting a final price at the end of an M&A process.
Suppose the eventual transaction price is €10 million. That does not necessarily mean TechFuture was “worth €10 million” in some universal sense.
The different figures answer different questions. The standalone DCF considers the economics of TechFuture itself. The replacement analysis considers the economics of obtaining similar capabilities another way. Comparable transactions provide evidence of what the market has paid for similar businesses. And strategic value incorporates benefits available to a particular acquirer.
The €10 million transaction price ultimately reflects the negotiation between buyer and seller. It could mean that the seller captures part of the additional value available to the strategic buyer while leaving enough of the expected synergies with the acquirer to make the transaction attractive.
Understanding these different concepts of value can therefore be important not only for producing a valuation, but also for supporting M&A strategy and negotiations.
An EBITDA+ approach
None of this makes EBITDA, DCF or conventional transaction multiples redundant. For a mature technology company, they may provide much of the answer.
But for a younger or strategically attractive technology business, understanding value may require a broader toolkit: sector-specific operating metrics and multiples, analysis of buyer synergies, and comparison with the cost, time and risk of obtaining the same capabilities another way. ESG factors can then be incorporated where they affect the durability or monetisation of those underlying assets.
We think of this as an EBITDA+ approach: conventional financial valuation remains the foundation, but is supplemented by analysis tailored to the economics of the technology business.
This changes the question from simply “What multiple should we apply?” to:
What is the buyer actually acquiring, what economic value can it generate, and what would obtaining the same capabilities another way cost?
Answering those questions can provide a richer understanding of value — and a stronger basis for investment decisions, M&A strategy and negotiations.