Impact of offshore development on valuation

·Clearly buyers look for profitable companies so anything that can reduce development costs is a good thing. Having said that, costs are increasing in most traditional outsourcing countries especially India. Of course, no SREDs, so one would have to look closely at the savings.

·Buyers also buy IP. In certain cases the IP may have been jeopardized if the off-shore country has less than a stellar track record in this area. Who else has the code?

·Buyers also buy innovation and the ability for the acquired company to continue to be innovative. Most innovation doesnt come from the off shore development. Conventional wisdom is that off-shoring works best in later stage products.

So there you have it the clear answer is it depends on your circumstance.

Seriously, if I were a startup looking for an exit and the buyer was more excited about the technology than the revenue/profits, I would keep everything close to home and in control.

If, however, I were more mature and looking at selling a revenue stream from more mature products, off-shoring would make sense to improve the EBITDA and the therefore corporate value in the traditional valuation metrics.

Posted by , Vice President on 6 November 2008
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