We’re a B2B business and a company wants to acquire us. How do you calculate the amount to sell?

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JASON LEMKIN

M&A prices are a weird beast.

Multiples of profits don’t usually work. Oftentimes, there are no profits, or only nominal ones, in fast-ish growing tech businesses. Multiples of revenues usually do work, but when they do, the acquirer is usually looking for a discount to their own revenue multiple. The acquirer is growing more slowly, so its own revenue multiple often isn’t that high. So sometimes that doesn’t work, either.

So how do folks figure out price?

First, if you are venture-backed, many times the price is a multiple of the last round valuation. Corp Dev executives will challenge this, but still, it’s true. M&A is often 2–3x the last round price. Yammer sold for 2x its last round price to Microsoft. Same with RelateIQ to Salesforce. Etc. etc. It’s not that acquirers like paying round multiples of last venture valuations. It’s just they know what it takes to clear a deal, at least in scenarios of a “hot” company or one that doesn’t need to sell. This is how we arrived at the price for the sale of my first start-up as well.

Second, are absolute comps. This happens most often that you might think. Company A in our space sold for $20m, and we’re 3x bigger and twice the brand equity. So $20m x 3 x 2 = $120m. Or we’re “as good” as another deal.

Third, in bigger deals, relative comps are more common that you’d think. WhatsApp sold for 10% of the market cap of Facebook. That was the price. 10%. “We’re 10% as important as all of Facebook”.

Ok that’s nutty hot tech M&A. What about less hot deals?

Acqui-hires are barely M&A, but are usually done as roughly $Xm per engineer. The investors almost get nothing, as often the common stockholders, so this is barely M&A.

VC-round equivalent pricing. Some deals are done as “in lieu of a VC round”. We have a term sheet at $50m pre. Want to match it?

Plain old next-year revenue multiples. This makes the most sense, except … M&A is rarely really sensible revenue acquisition. It’s usually driven by fear, occasionally greed. But when it’s an “accretive” acquisition, usually, it’s justified as a discount to next year’s effective revenue multiple vis-a-vis the acquirer. If an acquirer trades at 5x next year’s revenue, and you are planning to do $10m in GAAP revenue next year … the acquirer might be comfortable spending $50m or less for you. If it’s less than $50m (5x $10m), then they can deem the acquisition “accretive” and well bought.

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Published on July 12, 2016
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