THE QUESTIONS ENTREPRENEURS ARE ASKING: WHAT IS MY COMPANY WORTH?
In the M&A world, we at TechStrat hear the same questions pop up time and again. Today, we’re tackling one of the most common on our list.
What is my company worth?
It’s important to understand context first. Let’s dig in.
Process creates value.
A buyer or financial sponsor won’t understand how much you’re worth to them until they’ve faced the prospect of losing you to a competitor.
Financial multiples are derived from, not applied to, small strategic acquisitions.
Financial multiples are discussed in negotiations and are ultimately used for reality checks as well as to justify a final number. However, the acquirer of a small technology company will base the value on what it’s worth to them, rather than on trailing earnings multiples. But buyers don’t initiate discussions with the intention of paying a fixed multiple. Valuations are negotiated based on strategic value, including small deals; the valuation is not created by multiples.
Conversely, scale creates predictability in value. A company with over $50 million in revenue, consistent growth, and consistent profitability will have a defensible set of financial benchmarks on which to base a valuation.
Now let’s talk about what your small technology company is worth in the form of intrinsic value, market value, and synergy value.
Intrinsic value is the present value of all of your future cash flows. Nobody believes your forecast, so nobody will believe your DCF. That said, you should do the analysis because at the very least it will a) educate them on your vision for growth and b) influence their DCF analysis.
Market value is the value of your company compared to other similar companies that have sold recently, based on Price-to-Sales multiples, Price-to-EBITDA multiples, and any other available comparable metrics as well as your valuation based on a peer group of comparable public companies.
Synergy value is your value to a specific buyer, based on the synergies between your organization and theirs.
Let’s take a hypothetical situation. Your technology company made $3 million in EBITDA on $11 million in revenue last year. You expect to grow both Revenue and EBITDA by 15% annually. Your DCF value will depend on the applied discount rate and which model you use, but it will probably range from $20-$40 million. That is your intrinsic value.
Let’s also assume that your competitor recently sold for 8x EBITDA and 2x revenue, and you are very similar. Ignoring balance sheet adjustments, your market value is around $22 to $24 million. We can ignore the public markets; you are too small to be comparable to a large, publicly traded firm.
Finally, let’s assume that your acquirer has a distribution channel that’s perfect for your product and that they are under pressure to offer your product, or they risk losing market share to competitors. They have the potential to generate $25 million a year in recurring revenue from their customers in the first 12 months after the acquisition. So, what is the synergy value?
Process (and negotiation) will determine that number. But one thing is for sure: it will be higher than both the intrinsic and market valuations.