Yes, but valuations are trending up and have been doing so steadily since Feb 2009.
Software business owners dont tend to think in terms of multiples of free cash flow (FCF). If we assume FCF is close to EBITDA (ignore cash for capex and working cap) then your 5-7X FCF becomes roughly 1X revenue for a company generating 15-20% EBITDA, or 2X revenue for company in the range of 30-40% EBITDA.
A price of 1X revenue is hard to swallow for shareholders of a software company that has a track record of growth and good future prospects. That price may look better to them if growth has hit a plateau.
As a reference point, even in this market we are still getting M&A valuations greater than 1X revenue, even 2X revenue or better, from strategic buyers on deals that have strong synergies AND when the sellers are willing to be flexible on structure. Many sellers are holding out for this kind of strategic deal and are willing to share future risks with the buyer, provided the allocation is fair and the risks are manageable.
If you participated in our recent web event, the monthly M&A Flash Report for August, you may remember the valuation data presented by Ryan Blakely, VP of Research at Corum. The average transaction size decreased in 2009 compared to 2008, but our indices for six software sectors show a steady uptrend in public company valuations since February 2009. Private company valuations probably turn downward after public valuations begin to drop and may also lag a bit behind on the uptrend but were confident that private company valuations are also swinging back up as well.
The net is this: Yes, there are opportunities to buy at attractive valuations (from the buyers perspective) but its a challenge to find a healthy software company with strong cash flow, good growth potential AND for sale at a (relatively) low price. If I were in your shoes, I might target buying at 5-7X FCF but would not let valuation be the gating factor. My primary focus would be on what I could do with the company post acquisition and how I could drive future growth to ensure whatever price I pay is a good value.