YC Help: I need Acquisition Advice
The company I am a part of is in talks with another company and I am wondering if a 3-4 times earnings buyout would be fair?
Some background: the Start-up is 8 months old, and is primarily e-commerce based with plans to move into corporate and retail avenues. The growth has been exponential, and we have been profitable since 2 months after launch, with profits growing at least 110% each month (ie, we were profitable 16k one month, then the next we were 35k profitable, last month we hit 160k in Net Profit).
P.S. - Market Size: Every Internationally Traveling U.S. Citizen.
P.P.S. - I would not stay after the technology integration and neither would half of the employees.
40 comments
[ 3.5 ms ] story [ 80.2 ms ] threadIf your growth is really exponential...that should be an additional 10x multiple. So, 30-40x multiple overall.
Established high-tech companies like Google or Apple get 25-35 if good growth is expected.
They're trying to rape you.
Do you have revenue? What the COA vs. TLV for each customer? What's the market? What's the growth potential? Do you have a better than average chance of success if you make a go of it on your own? Do you potentially have blocking patents that this other company might need? Could you get funding on your own?
(Yes, I know you answered some of these questions above)
3-4 times is nothing spectacular, really. 10x is usually getting in the range of very good, but there is no static multiple that applies universally.
BTW, I haven't heard of anyone doing this, but you could look into NASDAQ portal. It's about 8 grand to register and is pretty similar to an IPO, but without Sarbanes-Oxley requirements. But, again, I know very little about this process.
At your size its all about how much they want you ans how much you want them. Step into their shoes for a while and see what they see. Do they see a 10 million dollar a year business if they roll it out throught their sales channels? What value do they see? Position it from that angle. Don't fall for pe ratios or crap like that. Its one thing if you are a solid stable company w/ predictable revenues but you are not. Be polite but firm. Don't let them pressure you. If you need more time, tell them you are taking more time. They'll try to rush you.
Finally, as you are doing this, think HARD about involving some professionals. Lawyers to help you get favorable terms, tax ppl to help you understand the tax implications (there is a GAINORMOUS DIFFERENCE between long term capital gains and short term). I know its difficult since they cost an arm and a leg but you can me losing out on a lot if you don't get some advice. Reach out to you uncles cousins buddy. Everyone likes helping the young kid trying to fight the corporation. They'll give you some free advice esp if its a favor.
Don't be afraid to ask for help and advice! We live in a society. People will help you out.
Finally, if they really want you, they will be back, no matter what they say. Think hard if this is really what you guys want. But as hard as it is, also be stone cold and make some probabilistic calculations. I'm sure it is a passion, but its also a business transaction. The irrational guy loses.
How long do you think you can keep the exponential growth up? Another couple of months? Or do you think your company can really dominate the travel (or whatever area you're in) marketplace?
This months net profits - 160k If you can sustain your 100%+ growth monthly for the next 6 months, you could hit a huge monthly profits number. Even with 50% growth, your monthly profits would be over a million with that kind of growth.
Which makes your current offer very low, this is why with that kind of growth people get huge multiples.
If they're NOT going to hire you, what are you going to do next? It doesn't sound like you'll have enough money to retire, which means you get a job or start something new.
You have an incredibly unique opportunity RIGHT NOW. Many entrepreneurs try multiple times and NEVER make something people want-- you may never do it again (there's a helluva lot of luck involved).
So, if I were you, I'd keep growing it unless you think it's a short term play or that it's going to quickly plateau.
Even if you ARE going to accept the offer, COUNTER. Say, "We think we're worth a lot more than that-- we'd like to see a better offer."
From a man who has actual experience in the field.
Points taken. Very much appreciated.
If you aren't profitable yet, you can do the same thing with the Price/Sales ratio, although that's more subjective and less accurate. It sounds like you may be new enough that all of these methods are out the window, and your valuation is based purely on your hotness and growth potential. In that case, I don't really know what you're worth. The only way to establish a fair value is to get a bidding war going.
Actually, if you are truly on an exponential growth vector then 3-4x earnings sounds low. Why would you even consider it? In a year, you would have earned more than you would have made by selling the company. Is there any reason to think your earnings have leveled off? Also, is this a cash or stock deal? Is the payout no-strings-attached or is there an earn-out requirement with target revenues?
to put things in perspective.
@ 10M and 3% you earn $300k a year in interest. @ 10M and a good money market you earn 8-12% or $800k-$1.2M a year. If you only spend 250k a year you will grow your money very fast.
in Wisconsin 1.5-2.5M and 150K a year in income qualifies you as an angel investor, and you can invest 100k and get 25k off of your taxes.
i think the guys are right, 10x is standard for tech growth.
you might consider a few options to the deal, like a payout bonus if the company performs better than X a percentage payout of lifetime earnings of 1% annually (which will keep you from being broke) technology licenses are normal. *the buyout price is for control, but not for all of the ownership, you might retain some shares which could be sold later.
*Quick note/question: You're saying that you hit 160K net profit last month, and that you're being offered 3-4 times earnings. Depending on your gross margins you're being offered at least $7.7M (assuming no change in monthly net profit). What are your earnings, might we ask?
If you have very tight margins (<10%) then I think this is a great deal, technology and speculation aside. If you have a high margin (>50%) then it probably isn't such a great deal.
Things to consider:
- How much of the buyout goes to you?
- How much are you personally making now?
- The average American (depending on education) earns about $3M in his/her entire lifetime. Will you have this or more after the deal? (This is a little test I apply to see if I would do or not do something).
- How risky is your company?
- How much risk are you willing to take?
Good luck with this. Congratulations for getting this far!
> How much are you personally making now?
If you get less than two years of salary then declining the offer would be the best option.
The OP does now YC, know the culture here, understands valuations. Why does he/she even consider selling for 3-4x earnings (i.e profit, not revenue). There must be something about the business ...