What is a fintech software company worth?

A buyer of any software company can ask how much of its revenue repeats. A fintech software company adds a question a project-management tool never has to answer: is the business allowed to do what it does, and will that permission still exist the day after it changes hands? A buyer reading the financial statements may therefore also be reading a regulatory file, a handful of counterparty contracts and a compliance record, any of which can bear on the price. This page explains what a buyer can be paying for, what can be discounted, how earnings can be recast and why two similar-looking companies can sit far apart. It offers no multiple, because one quoted without a specific company’s registrations, contracts and records would mislead.

The first question is whose permission it is

FINTRAC’s guidance says that a business providing invoice payment services, or payment services for goods and services, is engaged in the business of remitting or transmitting funds or dealing in virtual currency, and that dealing in virtual currency includes virtual currency exchange and transfer services. A business that offers such a service and has a place of business in Canada is a money services business and must register with FINTRAC before it begins to operate; one with no place of business in Canada that directs such services at, and provides them to, clients in Canada is a foreign money services business and must register too. For payment services, FINTRAC lists exceptions, including a business that solely accepts payment for goods or services it supplied to its own customers and one that solely provides hardware and offers no other associated payment services. A company that only supplies software to a regulated institution, and does not itself handle its clients’ funds, may therefore be a different asset from one whose platform moves money. The second may hold a registration and a compliance program of its own, along with the obligations and liabilities that come with them. The activity test, not the marketing label, decides which kind of company it is, so that question is worth settling before any pricing logic is applied.

What a buyer is paying for

Value here can rest on a short list of things.

• A registration held by the company itself and in good standing, rather than one resting on a founder’s personal circumstances.
• Contracted revenue from institutional clients, where the remaining term and the termination rights bear on how much of it counts.
• A compliance program that runs without its author, with the elements FINTRAC lists: a compliance officer, written policies and procedures, a risk assessment, a training program and an effectiveness review.
• Sponsor-bank, processor or network relationships that can be carried to a new owner on terms the counterparty will confirm.
• Software the company demonstrably owns, backed by signed assignments from everyone who wrote it.

What gets discounted

A buyer may discount permissions that do not travel. FINTRAC’s guidance treats registering, updating registration information and renewing as separate steps, and says certain persons or entities are not eligible to register. A registration tied to the person who built the company, or whose treatment on an ownership change nobody has confirmed, may be priced as uncertain. The second discount is counterparty rights: read each partner agreement for a change-of-control clause, because revenue flowing through a partner bank is only as durable as that bank’s willingness to keep it. The third is the compliance record. Under PIPEDA an organization must keep records of all breaches of security safeguards involving personal information under its control, and the Privacy Commissioner can ask to see them, so a company that cannot produce them may give a buyer a reason to lower the price or to hold part of it back.

How earnings are recast

Recasting can start with add-backs, such as owner pay above market and one-off costs, then add items particular to this business. If the founder has been acting as compliance officer for modest pay, a buyer may deduct the cost of a qualified replacement. Spending on remediation after a finding is a one-off on one reading and evidence of past underinvestment on another. A buyer may separate revenue by character: subscription fees from institutions, income that rises and falls with transaction volume and depends on a partner’s terms, and project work. The first is closest to recurring revenue as it is understood anywhere. If the company has claimed SR&ED incentives, which the CRA describes as a deduction against income and an investment tax credit claimed with the return, a buyer may ask how much reported profit is that incentive and whether it survives the sale; do SR&ED credits survive a change of control? covers the mechanism.

Why two similar companies price differently

Picture two payments-workflow products with similar subscription revenue. The first has contracts with several institutions, a registration in the company’s name, a documented compliance program and code written by employees. The second routes everything through one sponsor bank whose agreement can end on a change of control, relies on a founder who is both registered contact and compliance officer, and has core modules written by contractors. Under the Copyright Act the author is the first owner of the copyright in a work; an employer is the first owner of a work made in the course of employment under a contract of service unless there is an agreement to the contrary; and an assignment of copyright is not valid unless it is in writing and signed by the owner or the owner’s duly authorized agent. The second company’s income statement may match the first’s, yet a buyer may see a bundle of unanswered questions and price it accordingly. Business valuation methods compared shows how those risks enter the arithmetic.