selling a company - valuation

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hicabob
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selling a company - valuation

Post by hicabob » Wed Feb 22, 2012 6:43 pm

My little company has a serious suitor - hurrah! - they have bought smaller tech companies before and it seems the basic formula is to be able to pay for the aquisition within 5 years based on profits from said aquisition. Seems fairly reasonable to me but I was wondering if others who have experience with such things could share the "formula" they used/received?

livesoft
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Re: selling a company - valuation

Post by livesoft » Wed Feb 22, 2012 7:02 pm

I thought the formula was to drive the little company into bankruptcy by applying the screws, then "rescuing" the bankrupt remains at fire sale prices, then removing the screws and keeping all the profits going forward.
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hicabob
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Re: selling a company - valuation

Post by hicabob » Wed Feb 22, 2012 7:15 pm

livesoft wrote:I thought the formula was to drive the little company into bankruptcy by applying the screws, then "rescuing" the bankrupt remains at fire sale prices, then removing the screws and keeping all the profits going forward.
In this particular case we have a very advantageous patented technical position and we make a really decent profit so can be aggressive. If I were 20 years younger ... no sale would happen but I'm getting tired of the day to day small biz circus.

quiet_morning
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Re: selling a company - valuation

Post by quiet_morning » Wed Feb 22, 2012 8:30 pm

Just went through the same experience. There are three common methods to reach a valuation:
  • * Revenue/profit based (what you proposed, essentially an NPV or revenue multiple);
    * Cost based (what it would cost them to catch up with you or competing acquirer); and,
    * Comparable acquisitions in your market.
Of course, these are just starting points. Your company is a highly illiquid asset, so the price will depend highly upon negotiation. Good luck!

jbdiver
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Re: selling a company - valuation

Post by jbdiver » Wed Feb 22, 2012 8:51 pm

It's always best to have at least two suitors bidding on your business. You could consider working with a broker.

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Noobvestor
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Re: selling a company - valuation

Post by Noobvestor » Wed Feb 22, 2012 9:26 pm

jbdiver wrote:It's always best to have at least two suitors bidding on your business. You could consider working with a broker.
Agree - you can use all the objective-seeming metrics you want, but unless (a) you kind find highly-comparable companies that have sold, and figure out how much they sold for, etc.... or (b) you get other offers, you're largely going to be stuck spinning your wheels on theoretical valuations. When I had someone interested in on of my biz ventures, I went around to everyone else who had ever expressed interest, and sure enough one of them ended up buying it (not the person who had just inquired!) - so there is that benefit too (on top of then finding out what others were willing to pay for the same biz asset).
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mac808
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Re: selling a company - valuation

Post by mac808 » Wed Feb 22, 2012 9:54 pm

I sell small tech companies for a living. It's hard to engage a banker if you're selling for less than 10m, but there are other professionals you can use. 5x ebidta seems a little cheap, but the devil is in the details.

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tadamsmar
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Re: selling a company - valuation

Post by tadamsmar » Thu Feb 23, 2012 11:25 am

quiet_morning wrote:Just went through the same experience. There are three common methods to reach a valuation:
  • * Revenue/profit based (what you proposed, essentially an NPV or revenue multiple);
    * Cost based (what it would cost them to catch up with you or competing acquirer); and,
    * Comparable acquisitions in your market.
Of course, these are just starting points. Your company is a highly illiquid asset, so the price will depend highly upon negotiation. Good luck!
A few days ago an internal corporate appraiser I met at an airport said that 12 times yearly profit is used. I think that was more like taxable profit (reduced by only depreciation of capital improvements). But I am not sure about the details and it could be reduced by virtue or risk anyway I guess. We were called to the gate before I got to question him very much.

Lumpr
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Re: selling a company - valuation

Post by Lumpr » Thu Feb 23, 2012 11:33 am

hicabob wrote:My little company has a serious suitor - hurrah! - they have bought smaller tech companies before and it seems the basic formula is to be able to pay for the aquisition within 5 years based on profits from said aquisition. Seems fairly reasonable to me but I was wondering if others who have experience with such things could share the "formula" they used/received?
Does this mean you are being paid entirely from earn out? If so, seems like you're giving them a free option (not mention the nightmare of what happens if you dispute their earn out calculations).

hicabob
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Re: selling a company - valuation

Post by hicabob » Thu Feb 23, 2012 11:50 am

Lumpr wrote:
hicabob wrote:My little company has a serious suitor - hurrah! - they have bought smaller tech companies before and it seems the basic formula is to be able to pay for the aquisition within 5 years based on profits from said aquisition. Seems fairly reasonable to me but I was wondering if others who have experience with such things could share the "formula" they used/received?
Does this mean you are being paid entirely from earn out? If so, seems like you're giving them a free option (not mention the nightmare of what happens if you dispute their earn out calculations).

No - Lump sum - most up front - the rest at 12 months then 24 months - and a decent salary for 2 years minimum while the knowledge and manufacturing is transferred with an option to keep working for them afterwards if desired. The profitability is an estimate based on our profitability over the last few years substantiated by our books/tax returns.

ilmartello
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Re: selling a company - valuation

Post by ilmartello » Thu Feb 23, 2012 2:33 pm

Annual profit x 15

hicabob
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Re: selling a company - valuation

Post by hicabob » Thu Feb 23, 2012 8:06 pm

ilmartello wrote:Annual profit x 15

I'd vote for that!!!!! I think it would end discussions very quickly though.

Tony_L
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Re: selling a company - valuation

Post by Tony_L » Thu Feb 23, 2012 9:07 pm

Many mid and all large accounting practices have business valuation services. Bought & sold several companies over the years. This is one area I would not "cheap out" and would do major homework on finding a trusted firm with valuation experience.

ilmartello
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Re: selling a company - valuation

Post by ilmartello » Fri Feb 24, 2012 2:08 am

hicabob wrote:
ilmartello wrote:Annual profit x 15

I'd vote for that!!!!! I think it would end discussions very quickly though.
Why so? A P/E of around 15 in the stock market is considered to be a fair value. P/E is basically annual profit x 15

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