As of the end of the third quarter of 2010, 47 software deals have been completed, putting the year on track to match 2009's deal count of 58. In total 107 companies in the application software sector have closed deals with private equity groups  and financial buyers since the beginning of 2009, according to PitchBook.

The average application software deal was approximately $153.4 million this year, up significantly from $57.3 million in 2009.  This was thanks in large part to the $1.4 billion acquisition of Vertafore from TPG Capital in July 2010.  However, the median deal size has decreased slightly from $21.35 million to $17.8 million. This confirms that most of the activity in the application software space involves companies with revenues of approximately $10 million and EBITDA of between $2 and $3 million. 

Our recent experience representing a B2B application software company suggests that valuations are roughly 1.8 to 2.3 times trailing twelve month's revenues and roughly 5-7 times trailing twelve month's EBITDA.  Obviously a lot of factors affect valuation including the amount of recurring service and support revenues, customer "stickiness", historic growth trends, and future prospects.

This year 78 private equity groups have invested in the application software space. Some of the most active include Thoma Bravo (8 deals), The Carlyle Group (6 deals), Marlin Equity Partners (5 deals), Battery Ventures (4 deals) and Vista Equity Partners (3 deals).

If you own a software company and would like to understand your options, please contact the MidCap Advisors office nearest you.