Technology M&A: There are 4 Company Valuations for every Internet Service Company.
Eric Furlow
Technology Mergers & Acquisitions Advisor since 1996. "Hire someone with as many years experience doing their job as you have doing yours."
I have been discussing Internet service company valuations for over 20 years and what I realized a long time ago is there are 4 valuations for almost every Internet service company.
1) There is the valuation that the company CEO/owner has in their mind.
2) There is my valuation opinion … which other than deciding if I will accept the sellside assignment, is not very important because I am neither the seller nor the buyer.
3) There is the valuation range that most prospective buyers will come up with.
4) There is the valuation that the top 1-3 most logical and synergistic buyers will come up with as they discuss the seller’s company behind closed doors.
While valuation #1 above might be a financial requirement for the CEO … #3 & #4 are the only realities in terms of a transaction occurring. Focusing on receiving valuation #4 is the key to all successful company merger and divestiture strategies. The steps to receiving valuation #4 are to identify, engage and educate the greatest number of logical buyers.
Side Note: The guaranteed way to receive a low offer for the company is for a CEO/owner to only approach the easiest 1-2 buyers and force a sale to one of them … yet business owners do this all the time. Why do they do this? Because they are either uncomfortable with the divestiture process, not aware that there are far more buyers interested in acquiring their company than the 1-2 buyers who approached them first, and/or they don’t want to send a signal to the market that their company is for sale (even though there are ways to minimize this).
Identifying the logical buyers is only one of the hurdles, communicating one on one with the corporate M&A strategy decision maker at each of these acquiring companies is the next hurdle.
So who is the real M&A strategy decision maker at a tech company? ... who has the power within the company to actually make the company acquisition decision?
Many times I reach out to 4 or 5 of the top strategy decision makers at each company to make sure I reach the true power center of the company … and to increase the probability that an in-house conversation about my sellside client's company occurs. Of course typically the main strategy decision makers are the CEO, President and Chairman but sometimes in the technology space the founder of the company chooses to sit back from the spotlight in the CTO/CIO/CSO role … so I make sure to engage them as well.
Back to the highest valuation
When valuing a company, we all place greater or less emphasis on each of the typical variables such as: revenue, profit, customer base quality/growth/trends, fixed assets, IP, product/service strategies, management, employees, vendor relationships, on and on. Similar to conversations regarding religion or politics, one person rarely changes another person’s valuation opinion very much, especially if they are on the other side of the negotiating table. But what is missing from many valuation conversations is the aspect of the value from the buyer’s perspective. The value for the buyer depends on what that specific buyer is going to do with the company post closing ... and many times this is unknown to the seller.
In many industries, not all, the same business can logically be worth a 100% greater valuation to some buyers than others … so while there are always a few “low ballers” in the buyer pool, most buyers can be correct in their valuation opinion yet be far apart from the top 1-3 bidders.
In closing, it is in the seller’s best interest to identify the greatest number of potential buyers, educate them, be polite to the low ballers, follow up with the runner ups to ensure understanding, and respect the #1-3 bidder’s time.
Please feel free to Tweet, Like, Share, or Smirk and Smile.
FYI, I send out a “Weekly Internet M&A Deal List”. This list contains between 30-40 deals. Each week it is sent out to 1,000s of Internet executives and financial buyers around the world. If you would like to see the latest copy, message me. If you would like to be added to the auto weekly version, you can either sign up on my web site or message me and I will add you.
Click here to view my other articles … below is a list:
- A perfectly overpriced, initial "business asking price"
- Why billion dollar companies acquire tiny million dollar companies ... everyday.
- Two very different “7 times annual EBITDA” company valuation multiple scenarios
- Losing your job due to a tech merger or acquisition?
- The most ruthless tactic in private mergers and acquisitions
- There are 4 company valuations for every Internet service company
- It's nice to meet you ... but you're an outsider.
- Digital Agency M&A: Buyside Assignment, Valuation and Liquidity
- The MSP Company Valuation Dilemma
- The mirage of company valuation multiple expansion
- 14 Misconceptions & Mistakes with Company Divestitures
- Internet M&A: The perfect number and blend of MSP services to offer
- ICO's impact on company divestiture, valuation and liquidity
- 7 things to do 13 months prior to selling your Internet service business
- The difficulties of selling a 50/50 equity partnership
- Never do business with this person
- 2 Types of business sellers: Greedy & Desperate
- The startup strategy “pivot” … there is a hidden cost
- First discuss the geographic layout of an Internet service business with its owner.
- There is a better question to ask the business owner than, “Why do you want to sell your company?”
- Positive thoughts for startups raising capital … Most angel investors are not like the crew on “Shark Tank”, let me explain.
Founder and Managing Partner at The Host Broker and President at eBridge Marketing Solutions Inc.
9 年Well written Eric! Thanks!
Technology Mergers & Acquisitions Advisor since 1996. "Hire someone with as many years experience doing their job as you have doing yours."
9 年Hi Tony, I agree with your statement … "don't do reverse math to conclude your value based on someonelse's transaction" I have found that 1) in too many transactions there were very valuable fixed assets included as part of the deal which were not made public. This makes an apples to apples comparison irrelevant … and if a new seller is not aware of these fixed assets being included with the deal, this valuation mirage can be very damaging to the new seller’s divestiture efforts. 2) sometimes the total value of a deal was made public but the deal structure was not. New sellers read about the total valuation but are not aware that 25% of the deal was paid at closing and the remainder over a few years (or the 101 variations of this) 3) over the years there has been a former seller or two who stretch the truth about the value and terms of their company divestiture … like how many fish they caught the previous weekend. 4) the worst scenario is when an industry is post valuation peak and starts to decline each year … and sellers always want “last years valuation multiple or I cannot sell” … and this repeats itself each year for several years.
Digital Infrastructure Research, Edge Computing Media Publication
9 年Great article. Thanks for sharing!
Leader, Builder, M&A Advisor - Growth Stage Technology Companies
9 年Excellent article. The biggest mistake I see with 'sellers' is lacking a reason for selling. An actionable event that isn't pricing driven helps identify value of a transaction. I often tell potential sellers to collect as many data points as they can to determine value - don't do reverse math to conclude your value based on someonelse's transaction. Ultimately only what someone is willing to pay you determines your value.