A week or two ago, a reader – who shall remain nameless as they are currently in negotiations – asked for some advice on selling their business:
I have a software company with a new proprietary software technology. The company is considered for buyout due to the new technology (currently there are no revenues and no debt). The projected total revenues over the next three years is $1.55m (First year: $0.15m, 2nd year $0.4m & Third year: $1m) and total over six years is $4.55m (with 4th, 5th, 6th years at $1m each). What is the right valuation for this company if the company were to be acquired now.
This is a common request that I receive and I always have a soft spot for entrepreneurs, having been down this path a number of times, and I will give you some guidelines in a future post …
… but, in this case Mr X (as I will refer to him) has NO business to sell right now, so the usual formulas simply won’t work!
Why no business?
Well, as Mr X admits, the company has “no revenues” right now: no revenues, no business … no business, no business valuation.
But, Mr X does have a new proprietary software technology; apparently, one that at least one major company wants to acquire.
So, the first step is to recognize that we are selling a product (the “proprietary” rights to a new software technology), but we first need to find out what it would cost to duplicate the technology.
Mr X says: “4-6 months with 2 people on the job”
That puts a ‘lowball price’ on the software of $20k to $100k depending upon whether it is developed onshore or offshore.
Now, that’s assuming that it can be duplicated, but Mr X assures me that it cannot:
All major companies in this area have been trying to figure out an equivalent technology for the last 5-6 years or so, but with no success.
Given that Mr X’s software can’t be copied (6+ years development effort, with NO guarantee of success), then his company is worth whatever he can negotiate 🙂
Since he wanted a better estimate of potential selling price than that, I told him that it’s time to look at potential revenue, which Mr X projects over the next three years as: $1.55m (First year: $0.15m, 2nd year $0.4m & 3rd year: $1m).
If the company generates < $1 mill per year over the next three years, then I think that Mr X would be struggling to get $500k – $1 mill. for it …
… if he is offered less – and, he probably will be as the market is quite small for any major corporate (at the numbers provided above) then, if it were my software, I would be tempted to go ahead and get those revenues for myself then sell in 18 months to 3 years time.
Here’s my reasoning:
1. Development effort on Mr X’s side is tiny, but he feels strongly that his technology can’t be easily copied,
2. Mr X has a market that he feels can generate revenues of, say $1.5m+ over three years (discounted to today’s value), which are relatively small numbers for any substantive corporation.
In fact, if Mr X is offered more that that $500k to $1 mill. that I suggested, it will probably be as a result of a combination of how badly one of these companies wants (needs?) his technology and how big THEY think the market will be for them.
That’s why the next step, if Mr X hasn’t already done so, is to assess what revenues the purchaser believes they can make over the same period (better marketing/sales than Mr X?); better yet, what profitability.
If he doesn’t already have a good feel for these numbers, then he will need to try and get close to somebody on the inside of the company and carefully ask them …
… after all, the price that you set should always be as close to whatever the company that you are hoping to sell to can make, minus a fair margin for their trouble. Anything less, and you are being a little too generous 😉
“I have a great business that makes no money”. Right. My BS meter is detecting a reading.
I sold mine which generate 500k profit annually at a PE of 15 times.. which is around the industry benchmark for private sales of similar business.
I think the best is to get 3 business valuators to value your business and you could possibly get a range to work with.
@ WJ – “PE of 15 times.. which is around the industry benchmark for private sales of similar business”. Hardly 🙂
You did very well to make your $7mill. (assuming no partners to split it with) … presumably a strategic sale to a corporate?
Adrian, I’ve got seller’s remorse .. 🙁
Subsequently, interest rates went down a lot and I believe I could have fetch a better price since WACC is lower and the company might be able to offer higher! I think at the current interest rate, I could try for $10mil and people will bite.
Yah, it’s a case of 100% ownership, 100% MY MONEY. So now I have to ensure I continue to grow my money thru’ properties and stocks.
I’m running a business thats about $104 million a year in revenue, generating $22 million a year in EBITDA. We have about $30 million in cash- I’m hoping we can sell for $170 million plus sweeping the cash to our bankers- but I don’t think we would get more than 5-6 times our EBITDA on the sale.
Time to shop around the potential buyers…
Is your business in Australia called “PIS” ?
AS CONSOLIDATION of the country’s wealth management industry gathers pace, National Australia Bank is believed to be eyeing up financial planning firm Professional Investment Services (PIS), which is worth at least $250 million.
Mike, business your size should have a lot of bankers banging your door to act as your sales agent.
Have you gotten any valuation from them on what your business might be worth?
I think if they could wring more out of the buyers , it’s well worth paying for their services.
Probably good if you can share your million to hundred million story .. I sure can learn a few things from you! 🙂
The business is owned by private equity guys already- I was brought in as a hired hand last year to clean it up- increased the EBITDA by about $8-10 million over last year based on the full year forecast from the first 5 months of our financial year.
We have a competitor about to go public so that will bring more information to the table on valuations- at the moment though, we are looking to probably sell to another private equity party.
Don’t want to reveal too much about the business for obvious reasons but valuations are tough in this industry since profits are made with big volumes of production and the industry is very cyclical.
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Watching several shark tank episodes, it is apparent that getting investors in is a terrible way to raise money (huge equity loss). It seems you get on to shark tank to hook up with someone who can help you dramatically grow the business by linking you into distribution or new sales channels. Otherwise it’s best to grow using cash generated by the business.
The way we are going to shop our company is by approaching several competing businesses and private equity guys and trying to get them into a bidding war, much like shark tank!
“it’s best to grow using cash generated by the business” … and the only way to do that is to realize that the cash is not yours to spend!
BTW: this is exactly how I raised the cash to take my business multinational 🙂
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