We have a startup with a team of 9 people and we just release the beta of our saas product and thinking M&A. We are negociating deals with 2 companies and would like to explore M&A the same time to be acquired by a company that has bigger sales muscles. What is the best way to make the valuation for this company and how to sell it at maximum price.
This is largely a banking question, not a legal question. Still, let me offer my thoughts based on my corporate development experience.
First, I’m a big believer that if you focus on M&A from the outset (or really at any time), you significantly increase your chance of failure. Focus on building an amazing product, and if you succeed then maybe someone will try to buy your product/company. If they do, only then put some of your organizational focus into M&A.
IMO, products built for acquisition are seldom amazing, and less-than-amazing products are seldom acquired.
As for valuation, it really depends on how strategic you are to a potential buyer. If someone really wants your amazing product, then the valuation is whatever they are willing to pay. Many in the investing world often say that “valuation” is simply where a willing buyer meets a willing seller. You have to think through *why* a buyer wants you, and then highlight that “why” as much as possible during the valuation process.
If possible, you should try to build a valuation case based on comparable acquisitions. A sophisticated buyer will surely do the same. So, whether it is trailing revenue, revenue run rate, ebitda or net income, you should look at acquisition multiples based on those metrics to form an argument for your valuation. Let’s say you have 5mm in 12-month trailing revenue and you know of six similar companies who have sold for 10x trailing revenue, then you should use this as a benchmark in negotiating with a potential buyer.
Finally, the best way I know to drive valuation is have at least two buyers competing with one another. In every instance, healthy completion will only help your valuation. To combat this, many buyers will try to get you to “go exclusive” with them while they do due diligence on your business, etc. Try to avoid this to preserve as much competition as possible.
Business valuation is an area with which you can and often should seek consultant help. The appropriate candidate to assist you really depends on the nature of your industry and the type of product. The consultant you need in that regard is not necessarily a lawyer...explore your existing banking relationship to see about drumming up some referrals, interview and meet with the best candidates you find, and then develop a plan together to develop a meaningful basis for valuation. As Mr. Britton rightly points out, any potential business partner is going to do their own due diligence on this and won't take your numbers as gospel, but you want to have your own working figures and basis for asserting a particular value for purposes of negotiation.
There are plenty of other things that your team could likely use a lawyer's help with at this stage, however. Everything from entity formation and governance to securities offerings to employment agreements are basics things that corporate lawyers could help you address. It would also likely be a good idea to run the two active negotiations through counsel, to evaluate and help you manage any downstream contingencies or points of exposure. M&A agreements, if ever you end up heading that route, are complex transactions that are especially vital to explore with transactional attorneys' help.
If you already have existing legal relationships for your business, I encourage you to contact those attorneys to follow up on some of these items. If you need a referral to expert counsel in these areas or want to explore a new relationship, I would be pleased to pass along some good resources for you.
Good luck in building your business, and in moving your operations to the next level.
Valuation for startup companies is more of an art than a science, i.e. there's no standard rule or formula for valuing an early stage company. There are a plethora of facts and circumstances that go into valuing a company, including how attractive the company is to the potential buyer, the upside (or "scalability") of the product or service, the financial projections, the size of the potential market, etc. etc.
I'd encourage you to sit down with a business attorney to discuss your company, your objectives, and ways to accomplish these objectives. If you do move forward with selling your company, you should consult with an attorney to help put together the legal documents that are necessary for the transaction. You'll also want legal counsel to advise you during the due diligence stages of the acquisition process.
In short, contact a business attorney to discuss the details of your situation.
Get free answers from experienced attorneys.
19,947 answers this week
2,575 attorneys answering
Get answers from top-rated lawyers.
19,947 answers this week
2,575 attorneys answering