Public companies have models for calculation and comparable companies. For example, Price/Earnings (PE) ratios. Approaches vary based on Growth-oriented or Value-based investor profile.
Many founders look for that precise formula when they think about selling their company. But calling it a formula is likely too strong of a word to when you think about establishing a price at your current stage. More often the sale price is based on the buyer profile and a set of heuristics - especially for early-stage (pre-revenue and/or early revenue) companies.
Let’s start with the market valuation process and the 409A
- Asset approach (tangible & intangible)
- Income approach (present value of future cashflow)
- Market approach (comparable companies)
The firm will take a blended price of these three to establish the stock value for the use of options plan. For a breakdown of 409A Valuations from a lawyer go here.
Again, this is only for the stock price for options and is generally lower (or significantly lower) than market value. You’ll find a list of the top 10 methods from Startups.com below.
What can you sell your company for?
- Let’s start with momentum - if you’re growing fast you’ll create momentum to buy from the buyer’s perspective. If they don’t buy you know, the price will go up in six months. The inverse is also true, if you don’t have growth, you’ll likely not have high enthusiasm
- Strategic fit - does your product fit into the product road map of the buyer? Does it give the buyer new revenue to their existing customers?
- With cash, can the buyer forecast cash on cash return? For a financial buyer, could they invest and see visibility to returns?
- What the recent market transactions?
- What revenue models are you using?
- Is it a product company or a service company?
- Are you in a hot market?
The heuristics (rules of thumb):
- Service businesses sell for a multiple of trailing revenue of .75-1.5X trailing 12-month revenues
- Recurring revenue subscription businesses can sell for 5-15X future 12-months revenues
- Acquihires generally sell for a multiple of engineering talent (sorry, sales & marketing people don’t have the same value)
Need some help figuring out the value? Let me know how I can help.
And a Post Script this week: I discussed building relationships with upmarket buyers last week and Forbes had a great article later that same day on the topic, I’ve added it below.