I'm in the middle of negotiating an exit of a software startup company. My partner is interested in buying me out. We're negotiating on the valuation. Obviously a detailed analysis requires a lot of accounting and such but I just wanted to get a ballpark first.
The company in its first year had the revenue of 3M with a profit of 1.5M. In the coming year, it is projected to have around 8M of revenue. What kind of multiples are we looking at and what's the range?
Congradulations on your successful start-up!
How about between $10-12 million? That is based loosely on a multiplier of the annualized profit after the first quarter.
There are so many variables to consider here that the number above is worth as much as the pixels that were rearranged to convey it to you. Even a little more information about the nature of the past revenue contracts, the assumptions behind the projected 2011 revenue, the value of the market segment that your software is in, the viability of the scalability of 50% profit margin, season adjustments for annualizing first quarter revenue will all provide greater details which will determine what a good multiplier would be, and for whether it should be on profit/revenue or a mixture of both.
Different Models There are lots of different models for valuation. Which do you and your partner think best reflects that business model?
Most people will probably agree upon some mixture of these -- that mixture will be unique to your business, market and customers.
Get Support There is a entire software catagory of business valuation software. There is an entire industry of professionals that appraise businesses. They even have their own specialized accredidation. Doesn't everyone? :)
I know you were just looking for a ballpark figure right now, but I strongly recommended leveraging an agreed upon third party for the actual valuation.
Roughly, it's worth about what someone will pay for it :)
Is your first year number sustainable? Do you think growth would be flat, increasing, or decreasing?
If the company is healthy and there is a clear growth plan, then $10-$12MM valuation is probably a defensible number. If growth is flat, then a $1-$2MM valuation is probably closer to reality. I'm supposing at this stage growth isn't expected to drop off, or else none of these conversations would be happening.
Also, kind of like lottery tickets the value can sometimes depend on how you want to take the money. If you want one big check, and then will completely wash your hands of it, it might be an $8MM deal. If you plan to stay involved in some way (board of directors or advisors, consultant, etc.) and take a payout over 5 years, then a $15-$20MM number (earned over X years) could be plausible.
As a ballpark, I would say the company is worth around 15 million using a P/E ratio of 10. However, I would calculate the company's value based on actual, not theoretical earnings. To the extent a company has high projected growth, that could justify a higher P/E ratio, but the company is a very illiquid asset and has to be discounted accordingly.