A key metric to analyzing the longevity of a software company is its research and development budget. That was one point offered by Richard Temple, a former hospital CIO who now serves as an I.T. consultant for Beacon Partners. Temple made the point during his presentation on assessing vendor viability. "You should request a break-out of the vendor's research and development budget," he said. "What percentage of revenue is devoted to R&D? How much goes into each?"
Without an adequate R&D allocation, software vendors may be hard-pressed to maintain certification of future iterations of their software, he noted. That issue frequently comes up after a merger. Legacy systems may no longer be maintained, leaving providers organizations dependent on systems that are being sun-set.
Temple pointed out several sources of information to understand the financial viability of software companies. For publicly traded companies, he suggested using online brokerages, which often offer an array of background reports. For privately held companies, he advised potential buyers to ask for financial statements for the past two years. Such metrics as operating margin, cash on hand, and AR days can provide valuable insight into the both the likely longevity--and future direction--of a software company.
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