Business valuation plays a critical role in key corporate decisions, whether you're considering selling your business, acquiring another, or raising funds for growth. While the basic principles of valuation remain consistent, the context—mergers and acquisitions (M&A) versus fundraising—dramatically changes the approach, assumptions, and outcomes.
In this article, I wish to highlight the nuances that set these two valuation exercises apart.
1. Purpose of Valuation
- M&A: The primary objective is to determine the value for a transaction—be it selling, acquiring, or merging. The valuation often reflects a fair market price, accounting for synergies, market positioning, and strategic objectives.
- Fundraising: The goal is to assess the company’s potential future value, focusing on growth, scalability, and the return on investment (ROI) for new or existing investors. This often involves justifying a premium valuation based on projected growth metrics.
2. Key Focus Areas
M&A:
- Historical Performance: Buyers heavily weigh the company's track record, profitability, and stability.
- Synergies: The valuation may include synergies—cost savings, revenue enhancement, or strategic benefits realized post-transaction.
- Control Premiums: In many cases, acquiring a controlling stake warrants a premium over intrinsic value.
- Risk Mitigation: Due diligence often uncovers risks, which may adjust the valuation downward.
Fundraising:
- Future Growth Potential: Investors focus on the company’s ability to scale, gain market share, or disrupt industries.
- Market Multiples: Startups and growth companies are often valued based on forward multiples rather than historical EBITDA or revenue.
- Equity Dilution: Founders must balance valuation with the amount of equity to be given away, ensuring alignment of incentives.
3. Valuation Methods
While many methods overlap, their application differs in weight and emphasis:
Discounted Cash Flow (DCF):
- M&A: Focuses on established cash flows and near-term projections. Conservative growth assumptions are often applied.
- Fundraising: Projections are optimistic, with aggressive growth rates and larger terminal values.
Market Comparables:
- M&A: Relies on comparables within the same industry and geography, often adjusting for deal-specific factors like synergies or liquidity.
- Fundraising: May prioritize comparables from high-growth peers, even in unrelated industries (e.g., tech startups in different sectors).
Precedent Transactions:
- M&A: Looks at similar deals to benchmark value, with careful consideration of deal structure and strategic premiums.
- Fundraising: May include recent funding rounds or IPOs, focusing on multiples paid for high-growth businesses.
4. Stakeholder Considerations
M&A:
- Buyers: Seek value that aligns with strategic objectives, including long-term integration benefits.
- Sellers: Aim to maximize the transaction value while ensuring favorable terms and transition plans.
Fundraising:
- Founders/Management: Look to raise capital at the highest valuation with minimal equity dilution.
- Investors: Focus on their expected ROI, exit opportunities, and the credibility of growth projections.
5. The Role of Negotiation
- M&A: Valuation is often a starting point for negotiation. Terms like earn-outs, warranties, or deferred payments can affect the perceived value.
- Fundraising: Negotiations often focus on control, rights, and investor protections, with valuation being one of several critical elements.
6. Emotional and Strategic Drivers
- M&A: Transactions are often influenced by strategic imperatives—market consolidation, diversification, or succession planning. Emotional factors (e.g., founder legacy) can also play a role.
- Fundraising: The narrative is primarily about ambition and growth—how the company will capture opportunities, build market leadership, and reward investors.
Context is everything.
While the fundamentals of valuation remain rooted in financial analysis, the context—M&A versus fundraising—significantly impacts the approach. M&A valuation emphasizes current market realities and synergies, while fundraising focuses on future potential and growth stories.
Understanding these distinctions is vital for business owners, investors, and advisors to navigate these processes effectively and maximize value in their respective contexts.
About CFOLogic:
CFOLogic is an international CFO and FinOps firm. We have been working with tech businesses to optimise finance costs and maximise their peace of mind. Acting as extended finance teams for our clients, we have been providing support to accelerate their sustained growth by ensuring alignment within the finance function. Our experience has been with wide ranging businesses across industries, size, geographies, and lifecycle — from start-up to fundraise to scaleup to exit.
More about us: CFOLogic.com
