Define recurring revenue before using it
Reconcile subscription measures to accounting revenue and cash receipts. Separate recurring subscriptions from implementation fees, consulting, usage charges and one-off projects. Annualising a strong month can mislead when pricing, renewals or customer activity are irregular.
Review contracted terms, cancellation rights, discounts and outstanding delivery obligations. A prepaid annual contract produces cash before all services have been delivered. The cash balance and future cost of service must be considered consistently rather than treating all prepayments as surplus funds.
Growth and retention need to be read together
A growing revenue total can conceal losses from existing customers that are replaced by expensive new acquisitions. Examine customer and revenue retention, contraction, expansion and the concentration of revenue in major accounts. Definitions should remain consistent across periods.
For a small customer base, the loss or expansion of one account may dominate the trend. Explain that exposure and distinguish contracted commitments from pipeline opportunities. A sales forecast should show how leads convert into paying customers and what resources that requires.
The product brings maintenance obligations as well as opportunity
Software development expenditure does not automatically translate dollar-for-dollar into value. Consider the product’s commercial use, ownership, maintenance needs and reliance on key developers or third-party services. Capitalised development can also affect comparisons between reported earnings and ongoing cash expenditure.
A valuation is not a source-code audit. Where product quality, security, intellectual property ownership or technical debt is material, specialist due diligence may be needed. Flag these issues at the beginning so the report can explain what has and has not been examined.
Prepare commercial and financial evidence together
Early-stage or loss-making software businesses may require a scope beyond a straightforward earnings valuation. Discuss the purpose, funding stage and available evidence before relying on a headline industry multiple.
Before we begin
Your industry information checklist
- Monthly accounts and revenue reconciliations
- Recurring revenue and customer movement schedules
- Contracts and deferred revenue balances
- Development costs and ownership records
- Forecast assumptions and funding requirements
We confirm the documents needed once the purpose and scope are clear. For the common starting documents, see our valuation preparation guide.
General business valuation guidance. Service suitability, specialist input and fee are assessed for the individual matter.