Questions

How to value the exit price for a early stage startup? Multiple of current or forecasted revenues?

Our company could be described as a media publishing business. It's growing fast and the market is huge despite being very targeted. We have a buyout proposal from a huge company. They are suggesting to define this exit price based on the success we are able to achieve in the next few years. There will also be a minimum price and a cap for this. What would be a multiple of revenue that makes sense? Any other advice?

2answers

"Based on the success we are able to achieve" suggests, to me, you are looking at a price that will be tagged to an earn out provision. In other words, the price of the deal will be contingent on you achieving specific revenue targets in the future. If I'm reading this wrong, please correct me because it's an important piece of information.

Early stage startup typically suggests a focus on revenue growth with minimal focus on earnings. The most valuable acquisitions will be those that have growth in the top quartile of the industry along with an EBITDA that is also in the top quartile. Companies with these will have the highest multiples.

Revenue multiples are also a function of the industry and the general character of the market. Currently, the IPO markets are doing pretty well and the overall M&A market appears to be pretty solid making multiples equally solid.

In terms of industry, the media publishing industry has moderate to slow growth depending on the segment. I'm assuming there is a social or online component to your startup which would suggest that it would be part of the new growth side of the market. Generally speaking, market growth averages are at about 8% for larger companies suggesting that new entrants should be able to sustain low to mid double digit growth over a longer horizon.

"Growth rates", i.e. percentages, can be meaningless for very small companies. For instance, a company that grows from $25,000 to $250,000 in a year has a massive growth rate..... but the value may be very low due to lack of track record and overall profitability. As such, it can be very hard to estimate multiples.

That said, if I were putting forth a hypothetical, it would be something like the following:
Assuming: The company has over $1M in revenue and is growing at an average of 12 - 15% per year.
Assuming: The company is profitable, but barely, say something in the 10% EBITDA range.
Assuming: The company is a service company with few assets but is not subject to significant brain drain (key people leaving would result in devaluing the company).
If any of the above are wrong, it can change things significantly.

Revenue multiples might be in the 0.7 - 1.15x revenue on forward looking and .9 - 1.25 on a trailing level.
EBITDA Multiples could be in the 8 - 10 times on a forward looking and 10 - 12 times on a trailing level.

Take it with a grain of salt because there are a lot of factors you don't mention and more information is important to make a meaningful diagnosis.


Answered 5 years ago

This is a bit dated but one of the best articles I've read on valuation. I found it helpful when thinking about the issue for a company I was trying to sell and I couldn't possibly add anything to it. So here you go:

http://abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club/


Answered 5 years ago

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