How to Set the Price on Acquisitions

How do you set the price on your startup when it comes time to get acquired?

Maybe you haven’t even had time to think about selling your company, but have received an offer or some interest. Or maybe you are hitting a plateau and see an acquisition as a great way to get to the next level. Or you’re trying to plot your way to a multi-billion dollar exit. Whatever your scenario, the big question facing founders is how to value the startup. How do you come up with a price? What are potential buyers looking at when they are formulating an offer?

How Much Does Your Happiness Cost?

Before even worrying about the math and mechanics of an M&A deal and exit. Consider what your happiness is going to cost.

After all the splitting of the pie with co-founders and investors, and forking over your share to the IRS, what does that number left-over need to be to make it worth it to you to give up your startup baby? How much will be enough to keep you going through the acquisition process, and any potential earn-out period after the sale?

Some acquisitions can be fast and smooth. Others can take agonizing months of stress and sleepless nights. What is the minimum that is going to motivate you enough to stick through that?

There may be scenarios in which you just need to sell. But barring that this number should be the foundation you build up from.

The Four Main Ways to Value Your Startup

A startup is a unique kind of business sale. There can be a variety of potential acquirers who are considering buying you for very different reasons. A high growth startup is typically a very different deal with different motivations than buying a McDonald’s franchise or other local small businesses. 

There are four values to look at when pricing your startup.

1. Intrinsic Value

This is the real present tangible value of your company. Real assets, real cash flow, and real profit. Don’t worry, this isn’t likely your selling price if you are a high growth tech startup. However, this can be relevant in an asset purchase when being acquired by a financial buyer and calculating book value.

2. Market Value

Market value is what the regular market is expected to be willing to pay today. This may include a premium above intrinsic value. For example, when you look at the share prices of public companies, many would argue stocks are overvalued. Just as when fundraising, investors are really betting on future value.

Unicorns aren’t valued at billions because they are producing billions in profits today. It is hope in the long term possibility. It is also worth noting that market value can swing the other way to your detriment. In bear markets, the market may penalize you, and discount your true value and perceive such great risk that they are only willing to buy at less than your potential value and even intrinsic value.

3. Synergy Value

This is the sweet spot for you as a founder. This is where strategic acquirers can see far more potential worth, and you can unlock more value with the resources and merger. Your company and product can be worth so much more with the right blending.

Imagine tapping all of the traffic and engineering power and budget and credibility by being a part of Google tomorrow. This value is far greater than your company standing all alone. I’ve interviewed several successful founders on the DealMakers Podcast who have merged and created what are now Gmail, Google Drive, and Double Click. Some of their startups have been sold for over $1B. 

4. The Target Purchase Price

This is the most likely price range, which falls somewhere in between the synergy value and intrinsic value. Even the richest acquirers are unlikely to pay you in full upfront for what could be after several years of work, integration, and new capital infusions. They may see the need to act now and pay a premium to lock you up, but they have to justify the price to their shareholders too. This is the value gap or meeting point for striking a deal.

Four Steps to Get a Handle on Your Valuation 

1. Know Your Enterprise Value

What are your EBITDA earnings? What multiples are similar companies being bought at? Multiply that to arrive at a reasonable market value. 

2. Understand Your Equity Value

This means adding or subtracting any additional debts or cash on hand from your enterprise value. This is how much real equity you have right now. This can fluctuate between your term sheet and closing, depending on how you manage your money. 

3. Make Adjustments

Taking these numbers, you can make adjustments based on your startup, the market and buyer. For example, your track record and projected growth, strength of your team, IP, competition, market reputation, and customer happiness. This is where you can begin to tangibly tell the story on paper and in data of why your startup is actually worth that premium. 

Adjustments will also ultimately be made based on the deal structure. Will you be financing some of the purchase? How much will be held back in escrow? WIll you get stock instead of cash? Will you be willing to wait two years for the synergy to prove itself before getting the second half of the money?

4. Sell it

They say companies are bought, not sold. Yet, it is your job to influence potential acquirers to buy you and teach them how much they should be paying. Check out my free M&A pitch book template which you can use to make this happen.

Summary

There isn’t just one correct price for your startup. It’s not like a missing barcode at the supermarket. A good investment banker or M&A advisor can help you pinpoint your target exit price and develop a strategy around that to get the right offer, and ultimately sign the right deal. You have a lot more control over your price than you might think. Yet, you’ve got to know how market timing can work for and against you as well.

Bio

Alejandro Cremades is a serial entrepreneur and the author of the The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. It offers a step-by-step guide to today‘s way of raising money for entrepreneurs. 

Most recently, Alejandro built and exited CoFoundersLab, which is one of the largest communities of founders online. 

Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding, where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake). 

Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business. 

Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.