What business valuation would you place on a distribution management software company with $1.5 million in annual revenues and $500,000 in losses? How about a healthcare software ASP with $300 K in revenues that is breaking even? These companies don't exactly fit the 5 times EBITDA or the discounted cash flow valuation models.
That is what makes software or technology based companies so much fun to sell. Arriving at a business value is done the old fashion way. You identify the universe of likely buyers, prepare your blind profile and NDA, and contact the president or person in charge of mergers and acquisitions. What you are trying to accomplish is to identify and articulate the strategic rationale for considering this acquisition.
In the example above, our distribution management software company had adapted their software to a new vertical market while also introducing it on Microsoft's .NET platform and upgrading from green screen to GUI interfaces. They were not getting any traction in the new vertical competing against the two dominant players in that space. They had, however, created a lot of value in their technology. They were a very good acquisition candidate for one of the dominant competitors. They had ?leap-frogged? this competitor with a more modern platform. The competitor, through a series of prior acquisitions, was actually supporting six different software platforms for essentially the same capability. They were contemplating a long and expensive system rewrite. They needed to consolidate platforms, but did not have an upgrade path for their installed clients. Their clients were vulnerable to defections.
We approached the president and positioned our client as follows:
1.Purchase our client for a favorable buy versus build outcome.
2.Time to market ? We could provide an immediate upgrade path versus eighteen months of development
3.Substantial cost savings ? By rationalizing their software platform and reducing the number of supported systems
4.Immediately end customer defections by announcing an actual upgrade path versus years of promises
5.Prevent a more formidable competitor from getting his hands on this technology and causing them some real damage
The good news is it worked and we were able to get our sellers north of $2.5 million. Over a year later it has proven to be a good deal for both buyer and seller.
The healthcare ASP also turned out to be a strategic fit for a much larger healthcare IT firm. This established company had previously delivered their software through a traditional licensing approach where their clients managed their own internal systems. The buyers needed our client's cutting edge module that completed their suite of products. They intend to use the ASP model as the springboard to launch their entire product suite on the ASP model to complement their licensing approach.
Much of this transaction value was in the form of a well structured earn out. Both buyer and seller feel comfortable that the sales targets will be met and will provide the maximum contractual payment. This will result in a value for the seller of about $2.5 million. The buyer's customer base of 1400 hospitals are prime candidates to upgrade their current software system (the buyer's product of course) with this new capability. The seller achieves a 20 times improvement in the sale of their product as part of the large company. The large company increases revenues and uses a portion of that revenue to complete the purchase price obligation. It was accretive from day one.
When it comes to software or technology companies and business valuation, beauty is in the eye of the beholder. If the company can identify the right buyers and if they can be positioned as a strategic fit, traditional valuation metrics may not apply.
Much of the success of AIQ is due to the dedication and experience of our staff; they are key to providing outstanding support to our clients and to building better products. The average tenure of AIQ staff members of over 10 years is a reflection of the commitment of the AIQ staff to the company. AIQ has always been more than just a software “vendor." We strive to provide the best service possible to our clients by listening to their needs and acting on those needs as quickly and efficiently as possible.
We don’t bake cakes or build cars; we provide powerful trading tools and trading systems and support these tools with educational newsletters, seminars, tutorials and webinars (online seminars). Our goal is to help our clients become better traders and investors.
How have AIQ products evolved over the years and was this crucial to the company's success?
AIQ’s first product, StockExpert, was introduced in 1987 and provided basic charts, Expert Ratings, and some technical indicators. MarketExpert, a market timing system, quickly followed. Each of these packages included one of AIQ’s signature features, the Barometer Control Panel that gives a quick visual assessment of each of the technical indicators. Demand for derivative software les to the creation of OptionExpert and IndexExpert being added to the product line solely for options analysis. All of these products were very successful and provided the impetus for the development of TradingExpert.
Critical to AIQ's success was the decision to combine many of our packages into one suite, similar to the approach Microft does with Office. With the advent of TradingExpert, AIQ combined the strengths of MarketExpert and StockExpert into one powerful package and added group and sector analysis, a revolutionary concept at the time. Finally, a Portfolio Tracker was included and AIQ had one of the first really comprehensive trading packages on the market. Over the years, more and more powerful features were added to TradingExpert, including the Expert Design Studio, AIQ’s trading system writing and testing tool. This tool allowed our users to create their own trading systems and their own custom indicators.
In the late 1990s, AIQ merged all the add-on products into the TradingExpert software to create a power package that became known as TradingExpert Pro. While TradingExpert continued as a basic analysis tool, most of AIQ’s clients moved to the new combined system�"TradingExpert Pro. Today, some 10 years since TradingExpert Pro was first introduced, it remains our premier package.
How has your industry changed over the years?
Times change, and few investment software companies have succeeded as long as we have. Product is shipped on CDs now rather than 5 ¼ inch floppies. Data is delivered over the internet rather than using computer modems. Today’s computers are lightning fast, allowing retail investors to employ tools that were only available to elite institutional investors.
There is no doubt that charting is now a de facto commodity provided by almost every investing or trading software service. Many of the free charting tools available on the internet provide basic price bars, including even Candlesticks and moving averages. However, while these tools provide good looking charts, they lack the power tools that the informed investor and trader needs.
Most brokerage companies also provide some technical analysis tools for their clients. However, very few offer high-end analysis tools like those incorporated in AIQ TradingExpert Pro.
The industry has also experienced big changes in software and data prices. AIQ’s four stand-alone DOS products originally sold at about $1500 each. And to use the software you had to subscribe to a data vendor. In the early 1990s, data cost anywhere from $60 to $100 a month but fell in price steadily over time. The biggest change in pricing for AIQ came about in the late 1990s when AIQ first offered TradingExpert Pro bundled with myTrack as a monthly subscription service. The software no longer had to be purchased with data paid for separately. Instead, you paid one monthly fee for the data and software combined. And the other bonus was never having to pay for an upgrade again.
What do you consider are the strengths of AIQ and what have they contributed to the success?
The depth of knowledge and experience of the AIQ staff is our most invaluable strength. Our experience and knowledge has led to the development of many of the unique and powerful features in TradingExpert Pro.
Our industry group and sector rotation features were revolutionary when TradingExpert was released, and they remain unmatched today. We have powerful breadth management tools that are useful in identifying market tops and bottoms. Market Breath Builder and Breadth Analyzer allow users to create breadth and volume statistics on any set of stocks or any set of indicators. Other software packages now have back testing capabilities but none are as easy as AIQ’s. We realized most people don’t like to program code, even if the language is supposedly easy. To that extent we’ve created over 250 pre-built rules that users can cut and paste as they create and test trading systems. Portfolio Simulation was another pioneering breakthrough that has given AIQ an edge. As many traders and investors have discovered, back testing only goes part of the way when you’re developing a trading strategy. Something more realistic was needed, so our programmers developed a new tool called Portfolio Simulator. Portfolio Simulation does real life walk forward testing under real trading conditions. Only through this kind of testing can you prove that a strategy works for your trading style. What sets us apart is our desire for our users to become successful traders. We don’t just give you the tools, we provide educational support and most of the support is free of charge. We also offer a variety of webbased seminars every month covering a wide range of technical topics. Most of these “webinars" are free and are archived for viewing at your convenience. They are found at www.aiqsystems.com. Finally, this year we will hold our 18th annual Lake Tahoe Seminar October 1-3 at Harvey’s Resort and Casino at Lake Tahoe.
Where do you see AIQ going in the future?
Regarding analysis tools, AIQ is currently focused on two directions. First, we are in the final stages of rolling out an automatic Chart Pattern Recognition system. For each pattern found, the system generates supporting information such as strength of confirming volume, direction, and trend. Patterns are also stored historically for back testing as part of a trading strategy. Chart Pattern Recognition will be an add-on service for TradingExpert Pro users.
Second, we are incorporating many of our primary analysis tools into a browser environment so that it will be possible to access your AIQ analysis tools wherever a browser is available.
As our technical analysis tools have matured and advanced over the years, so have the features requested by AIQ clients. Every request is recorded and analyzed for suitability and desirability as a feature in a future release. We value all feedback. It is this feedback from our clients in conjunction with our own ideas that leads to the development of new power features.
Steve Hill is President of AIQ Systems. http://www.aiq.com For the past 14 years he has been involved in all aspects of AIQ Systems, from support and sales to programming and education. Steve is a frequent speaker at events in the U.S. and Europe, talking on subjects as diverse as Portfolio Simulation Techniques, Advanced Chart Pattern Analysis and Trading System Design. Steve is an avid martial artist and cross-country skier. currently holding the rank of Shodan (first degree black belt) in Shito-Ryu Okinawan Karate. He also serves on the board of the Ralph Parks Portfolio Trust. AIQ Systems is a world leader in intelligent trading software. Their web site can be found at http://www.aiqsystems.com
Both Dave Kauppi & Stephen Hill are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.