By law licensed movers in Oregon cant give you a firm price. They must estimate how much they will charge basing their estimate primarily on weight. In our recent move, two movers estimated from 9,000 11,000 lbs and the winner, who had the best credentials, moved 17,000 lbs, thus nearly doubling the moving cost. I wasnt happy, but its hard to argue when your stuff is on the truck and the new home owner is taking possession in a few hours.

In a way valuing a software business is like that. We estimate what an informed buyer might be willing to pay at some undetermined future time based on what we know today. Value depends on how useful something is compared to other things to a particular buyer under a particular set of circumstances. Thus, valuations are subjective and the one the buyer does is more important. Additionally, valuing a software business is a more subjective process than valuing a traditional business because the value is largely based on the future earnings of a hard to quantify intellectual property - software. So, like movers, were essentially looking at the outside of sealed boxes and estimating the value based on our experience. We use formulas for computing the value of future earnings, etc. use metrics from publically held software companies and look carefully for recent deals that compare to develop a range of potential values to develop a range of numbers within which a price someone is willing to pay might fall.

Despite the shortcomings of valuations we always do them. Its tradition and its useful to know what the formulas tell us because we assume the buyers will go through the exercise themselves. By doing it, we know what they know. However, we dont often give them to the buyer upfront because by presenting a valuation weve making a price offer and weve set the ceiling. Why would the buyer offer more than what we think the business is worth? After they offer, we can give them our analysis as part of our counter if we want.