We are a data and mobile app start-up based in the UK. We were in touch with a large brand initially about partnership but now they have said they would like to acquire us. However they want us to come up with business valuation. Our business is only a year old with small amount of traction, but strategically important to their business. They are the only bidders right now. How should we approach the negotiation and/or the initial valuation?
As you may know, we acquired Clarity recently and have done numerous acquisitions at Startups.co so we spend a lot of time thinking about this. I've also personally been acquired a few times so I've been on both sides.
With that said I think the earlier comment about how much value you can bring to the acquirer is always a great place to start.
For example, if your company had $100k in sales per year, no reasonable multiple of that is going to get you into a meaningful acquisition price. So scratch that.
Instead - try to determine what kind of revenue the acquirer might generate in the first and second year post acquisition. That at least gives you a starting point.
What you can't do is start thinking about what Instagram sold for. None of that type of silly math matters. Those are one of conditions where a company is in such hot demand is so singular in it's value (no one else was that big at that time in that particular segment) that they play by entirely different rules.
What's nice about the 'what value can we bring' discussion is that it shows that you are thinking about what's in it for them, not just what's in it for you.
I have dealt with this before. I recommend finding out how much the acquirer pays to acquire customers, users or accounts today. CPCA- cost per customer acquired
Also ascertain how much a client, user or account is worth to them. LTV - long term value
From these metrics you can put some value to what you have. Then trend that out over 3-5 yr period.
The key is to make the buyer part of the valuation. Don't go off and do this and come back with a value. They need to be a part of it for your valuation to be accepted. There are no absolutes in this.
From my back of a napkin calculations that is what Facebook did to buy Instagram.
1. Value in the business is whatever the investor is willing to pay.
2. Since you are only a year old have them come to you with a valuation.
3. If they insist on you coming up with something. Estimate how much revenue you could bring in for them.
4. Based on the revenue do a multiplier of what companies in that industry are trading for. It could be 10X, 15X etc
5. Also make sure it is clear if it an all cash deal. Or blend of stock and cash.
The other way to do this is reach out to the competitors of the company you are dealing with to see if there is interest Create a bidding war is the main goal.
the start up is a quirky little animal. The most important item is to check for transferability to the buyer and scalability for future growth. Those two items, if strong, will increase the value of the company. Without them, well, not much of interest. I also like what Will said
There are many factors in determining the correct strategy. It would be impossible for anyone to give you meaningful advice in a one post answer.
You need to analyze your position and the position of the acquirer, as well as the market in general before making decisions.
The focus of our business is representing early stage digital startups in M&A transactions with larger companies. The most common case is a smaller company with an app or widget which promises to return value on a per user basis and an acquirer with a larger user base that can more efficiently monetize the app/widget/platform.
We specialize in representing US, European and LatAm-based companies in discussions with US and International buyers. I am the co-founder of the largest Internet business accelerator in LatAm (www.NXTPLabs.com) and have successfully represented the seller in 8 such transactions in the past 24 months.
Let me know if you need guidance.
You have two main sections to consider on this valuation:-
First Section: your company value:-
Here you need to value your company as per the free cash flow basic. This will be your start point.
Also, your performance versus the competitor, and cash flow to equity invested. Also if the company has debt or no.
The lower you go for your WACC the better.
You need to also emphasis on growth opportunities by showing market acquisitions you had since you started the company till now, and the future opportunities for growth.
Another thing to consider, is the value of similar competitiors in the same market , with similar average size or scope of work. As these companies , already have an older history , so their cash flow can be used to predict your future cash flow more precisely.
Other items that can raise the value of your company is the number of PhDs you have in your company , if you have an R&D department / expenditure , if you filed a patent on something your company works on, like a special data mining algorithm or something. These will be valued with options valuation techniques.
Second Section: the value added to the acquirer after this acquisition. Your acquisition should add an extra value to the other company as well..
So 1 + 1 = 3 not 2.
You need to reflect how your acquisition will affect the operational efficiency in the other company ( if it does ) , or increasing its cash flow / sales . Also increasing the working capital for the other company , as lots of solid assets may not be needed, like relocating offices to their buildings. Also using the acquirer company departments, like financial department , HR department..etc., for both companies, will enlarge the scale of work , maximise expertise, and also decrease the running cost relatively. This added value in the acquisition should be counted as well in your company value.
Let me know if you have more questions.
Good Luck !
Agree with a lot of the comments already made. Here is my take.
How much will they pay? As mentioned, this will depend on not only the value you are generating today but how much value will your business provide when combined with theirs. It could also help if there is another business willing to buy your business. It may pay to find another potential buyer as it can ratchet up your business value quite alot.
At such an early stage multiples mean very little. It all depends on how much you are willing to sell it for. If this number is worlds apart from what they are willing to pay then its probably not worth wasting time discussing further. The amount can be affected by the terms of the deal. For example, whether its all cash or you earn equity in the merged company as well. If the latter potential upside could be significant so you dont necessarily need to get the big number up front. This model has many pros and cons and requires a lot of advice on contract terms particularly regarding control and commitment to investment.
Finally there was a recent acquisition I am aware of where the seller worked out a valuation based on how the buyer's company was valued. This is easy if the buying company is public, not so easy if the company is private and hasn't had any recent investment. But if possible and favourable it could be a great metric to use.
Hope that helps and feel free to call me to discuss further.