How startups are valued during an acquisition? While billion-dollar startup stories seem to be everywhere, the average exit is still really only around $150 million. Where on this scale will your startup acquisition land?
It’s important to know what your company is worth. You don’t want to throw out a ridiculously low offer and sell yourself short by a billion.
Nor is it smart to hold out for an insane number that will get you ignored by serious buyers. As a founding executive, you also have a responsibility to your investors and need to be able to justify the numbers to them.
It can be a bit of an art to figure out how startups are valued during an acquisition. Especially an early-stage startup. Some will just say “it’s worth what someone will pay you for it.” That may be true, but there is a little more to it than that.
Factors Impacting How Much Your Startup is Worth
Some of the many factors influencing the value of your startup and the offers you can command include:
- The current market
- Who is buying you
- Competition to buy you
- How they are paying (cash or stock)
- The clauses in the term sheet (i.e. earnouts)
- Recent valuations at fundraising rounds
- The moat you have around your business (or not)
- How organized you and your documents are
- The strength of your relationships with potential acquirers
A great pitch book and story can go a long way before you even get to the point of thinking about how startups are valued during an acquisition. Mastering the storytelling side and how you are positioning your business is done via your acquisition memorandum. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Common Approaches and picking the best valuation method
Here are some of the most common methods showing how startups are valued during an acquisition.
1) Earnings Multiples
Mature businesses and public stocks are measured in multiples of their earnings. In quarter one 2019 CSI Market reports the average price to earnings ratio in technology averaging almost 30%.
Software and programming businesses were trading at an incredible ratio of 43.53. Note that is far above historical averages for the stock market as a whole.
The main problem with this methodology for many startups is that they have no net profit, and maybe no meaningful revenues at all.
2) Your Number
If you have investors and co-owners you have a legal responsibility or fiduciary duty to them. You can’t just ignore reasonable offers. However, you should have a number in mind.
If you’ve been bootstrapping, you might have the only call on whether to take an offer or not. So, how much do you need to walk away with to make it worth it for you?
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