Skip to content

How to get the highest possible valuation for your company

by on February 7, 2014


If you’re going to sell your company, every CEO wants to sell their company at the highest valuation possible.  That’s a no-brainer.

The problem is how to make that happen.Valuation Method

Let’s look at the software industry, where I am most familiar.  The primary method for valuing a software company is as a multiple of revenues.  For other industries it may be a multiple of EBITDA.  But for software, because there are so many soft assets and because growth is the primary factor driving profits, not expense management, the valuation method is a multiple of revenues.

A valuation that is 2x trailing twelve month (ttm) revenue is an okay valuation.  For instance, if revenue in 2013 was $50 MM and some company valued your company at $100 MM, you’d have a 2x multiple.  But you want something greater.  A 4x would put the valuation at $200 MM.  Can you get a 10x valuation?  It’s possible.  The higher the multiple, the higher the valuation.

Furthermore, as a seller you definitely want to emphasize your next twelve months revenue and obtain a valuation based on that multiple.  If, for instance, you expect to do $65 MM in 2014 you’d love to get a valuation multiple of 4x on next twelve months revenue (ntm), or $260 MM. What about a 10x multiple on ntm revenue? That’s where you want your buyer to focus.

Keys to High Valuation

So what drives a higher valuation?

  1. Growth – If revenues are growing at a rapid pace, and “rapid” is a relative term, the buyer will be willing to pay a premium because it expects similar results once your technology and product are a part of its company. Rapid for a small company may be 200% while rapid for a mid-size company may be 20%.
  2. Technology – If your technology is disruptive, or it fills a hole in the buyer’s solution offering that is costly and takes a long time to replicate, then the buyer will be willing to pay a premium.
  3. Competition – A buyer will pay a premium if it believes there is another party interested.   A competitive bidding situation can dramatically increase the valuation.

You don’t have to have all three points to get a high valuation, but if you do you are very likely to drive an extremely high multiple for your company.  Those are the ones you see in the paper, like Facebook’s acquisition of Instagram.

The M&A Process

I work with a lot of clients that have great ideas and great products.  The CEOs are focused on building their businesses and improving their products, as they should. CEOs need to passionately build their standalone company but at the same time build a company that could be acquired by early identified potential acquirers.  They realize that the M&A process is not a one-time thing or an isolated incident. It’s something you have to be thinking about and working towards for the life of the company.

It’s important that the CEOs focus on building the company and for someone else to meet with potential acquirers on behalf of the company.  An intermediary can be objective, act as a filter, and not see the potential acquirer as an adversary.  That’s why I’m engaged.  They require ideas, insights, and proven methods used in similar situations elsewhere to correctly position their company to be acquired at the desired price by a desired company. They’ve engaged me to help them design their companies to be acquired, to identify potential acquirers and to position themselves so that they’re valued as something more than a multiple to revenues.

By positioning the company correctly, by getting it on the radar of potential acquirers early, and by accelerating growth, we will position the company to obtain the highest possible valuation when it’s time to sell.

There are opportunities to increase your company’s valuation – hiding right in front of you.

But they’re not the ones you’ve been looking at.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.

If you’re wondering how you build a company that you can sell it for premium in a few years, contact me to discuss the Valuation Amplification Process.


From → Uncategorized

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: