The software industry remains an extremely attractive sector for mergers and acquisitions (M&A), driven by ongoing consolidation within the industry. Following a strong surge in 2021, the market has cooled but remains stable. Both strategic and financial investors are seeking high-value assets. However, what sets high-value transactions apart from the rest?

In the competitive software M&A landscape, understanding the factors that drive valuation multiples is crucial. Investors and acquirers are looking beyond simple growth metrics to identify companies with sustainable business models and strong financial performance.

Based on our extensive experience with recent software transactions, we identified 7 key value drivers behind high EV/Revenue multiples in software transactions, offering invaluable insights for buyers, sellers, and investors alike:

  1. Rule of 40%:Companies that demonstrate both robust growth and strong EBITDA margins consistently achieve higher multiples. A rule of thumb says that the sum of the revenue growth and margin should be at least 40% to achieve the highest multiples.
  1. Recurring Revenue Models: Firms with predictable, recurring revenue streams are more attractive to investors compared to those relying on one-off revenues.
  2. Positive or Near-Break-Even Cash Flow: Investors reward companies with stable or improving cash flows, while penalizing those with negative cash flows.
  3. Low Customer Churn: Strong customer retention rates highlight the sustainability of a company’s revenue and market position.
  4. Net Revenue Retention (NRR): Companies with NRR above 100%—indicating growth from existing customers—are particularly attractive.
  5. Size Discount: Private transactions involving small and medium-sized enterprises (SMEs) often face valuation discounts compared to larger peers.
  6. Regional Trends: US-based software firms typically achieve higher valuations than European firms, reflecting regional market differences.

Curious to learn more?

In our latest software sector market report, we provide a comprehensive overview of M&A activity, key buyer groups, and showcase recent industry transactions. Contact our M&A team here to receive the full report.