Internet M&A: Company Valuations … the reasons, ranges and reliability

The reasons:

There are many reasons that business owners, CEOs, investors, exiting partners, soon to be partners, and lenders need a third party to create a Company Valuation Report.

There are the happy scenarios.  For example, business owners want to know how much the company is worth to then decide if they want to go through the divestiture process.  Another example is, an investor wants a second opinion on a company they are thinking about investing in.  This investor may have a realistic perception of value and a logical post-closing investment strategy, however they just want an extra voice to confirm and quantify the strengths and weaknesses.

Then there are the situations where different stakeholders are not getting along. These include partnership fights, divorces, financial defaults with investors and lenders, etc.  These disagreements are sometimes mild, for example if three equity partners simply disagree on the value of their company because one of the three partners wants to retire and the other two partners want to buy him out … but other than this difference in opinion, they get along fine.  Of course, there are the more severe disagreements where different stakeholders are either suing each other, or about to.

My thoughts on the legal fights regarding value are that if one side hires someone to do a valuation, the other side will simply not agree.  Having said that, eventually a valuation or a company divestiture will be forced on the parties.  Valuations in contentious situations tend to help if both sides of the fight agree to hire someone, or hire three different firms to do a company valuation and average the three valuation figures etc.  In some situations, when a single company valuation is received, one party will quickly approve the results and the other party will eventually approve the results as well, not because they agree with the final valuation figure, rather they believe the valuation difference is less than the legal fees and hassle of a continued multi-year legal fight … so they accept the results and move on.

The ranges of valuation formats:

There are many formats of a company valuation.  Two of the main reasons for different formats are the cost and the purpose or need of a company valuation.  One common format of a valuation in many industries is geared towards lenders who focus heavily on fixed “hard” asset values (however irrelevant this can sometimes be in the Internet service sector especially in the SaaS, development and consulting areas).  These company valuation reports can be very in-depth and of course quite expensive.  These valuations start with a macroeconomic overview, then analyze the entire industry the company is in, then analyze the company, finally value individual assets all the way down to the estimated value of every desktop computer in every office.  This format of a company valuation is obviously needed in many scenarios because stakeholders commonly pay $20k, $30k, $40k, and yes over $50k for these types of valuations.

But what if stakeholders of sub $20mm companies simply want to know what the company is worth and what buyers will probably like and not like about their company, if it were properly marketed over the next 3 months.  These business owners are already in the industry, so they don’t need to pay someone to tell them industry stats which they already know … they just want to know how much money the company could be sold for. 

The valuation reports I create are focused on the most probable results of a properly marketed divestiture process.  My reports are named, “Company Valuation and Liquidity Analysis Report”, and contain an analysis of the many value drivers within most Internet service companies. I include the comments, criticisms and praises that a company owner will almost certainly hear from buyers if they put their company on the market … almost word for word.

I have been focused on acquiring, divesting and valuing Internet service companies since 1996, primarily the recurring revenue business models (hosting, access, MSPs, VARS, SaaS, colo, data center) but secondarily the one-time revenue business models (web/mobile/app/software development, digital agencies and IT consulting).  I have stayed away from the hardware sales and domain name sales markets.  

I include “Liquidity Analysis” because this process identifies the abundance or lack of liquidity for a specific business model and each of the individual service offerings, and this is one of the main drivers of company value. In addition, in today’s Internet service world, most companies offer multiple services to their clients.  Some of these services are cutting edge and some have been around for a long time.  Each service within a company needs to be analyzed and valued as far as its positive or negative contribution to the entire company valuation.  

Side Note: Offering a new “cutting edge” I.T. service is not always a good thing because they tend to be cash burning learning experiences for the providing company … and continuing to offer an “old school” service is many times far from being a bad thing because many tend to be cash cows and are low maintenance.

In the Internet service sector, value is focused around customers, IP, employees, brand name momentum, and of course revenue, profit, growth … then hard assets  (other than the data center world of course).  This is as opposed to other industries like real estate or energy where “hard assets” are #1, followed by the other value drivers in different order.

At the end of my reports, I give valuation ranges depending upon how fast or slow the company would need to be sold, and if the seller has any restrictive deal structure requirements.  

Reliability:

Keeping this concept short and sweet.  There are generalists who will value companies in many industries from restaurants, gas stations, hotels, car dealerships, on and on … then there are specialists who will only do company valuations in a few closely related industries.  I have never figured out why a stakeholder would spend their money to hire a generalist as opposed to a specialist … unless they are hoping the company valuation will turn out better than what the specialist is likely to produce.

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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.

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