How to Choose Your Valuation Multiple [Webinar Recap]

Everyone has an opinion on your valuation – but whose is correct? That’s the question we try to answer in today’s webinar recap. What’s the science behind your valuation multiple? How can you choose the correct one for your goals and business that’s also easy to justify to buyers?

Join our CEO and Founder Andrew Gazdecki and Acquisitions Director Christian Steverson as we delve deep inside the complex world of multiple valuations. Check out the full replay and Q&A in the video below or skip straight to the clip and highlights for each topic discussed. 

Who’s Presenting?

Andrew Gazdecki, Founder and CEO of Acquire.com

Andrew Gazdecki is the founder and CEO of Acquire.com and a lifelong entrepreneur. He bootstrapped his first business, Bizness Apps, to $10 million in annual recurring revenue, which he later sold to a private equity firm in a life-changing acquisition. Since then, he’s sold two more businesses, bought one, and founded the world’s largest startup acquisition marketplace.  

Having been on sides of the M&A table, as a buyer and a seller, Andrew knows how complex and difficult acquisitions can be. He started Acquire.com to fix the complex acquisition process and make it easier for founders to get acquired, and he’s excited to share his knowledge with you today.

Christian Steverson, Director of Acquisitions

Christian is a seasoned leader across SaaS, technology, and sales. When not closing multimillion-dollar transactions, he’s helping founders navigate the trickier parts of the acquisition process and setting them up for success under the Guided by Acquire program. Christian is a renowned troubleshooter within the Acquire.com M&A team and regularly rescues deals using expert negotiation tactics.

What Is Acquire.com?

Acquire.com is the best online marketplace to buy and sell SaaS startups. Combining expert M&A advisory and technology, our services help you get Acquire’d fast and maximize your exit. 

Since 2019, we’ve helped over a thousand founders sell their businesses, closed over half a billion dollars in deal volume, and registered over 500,000 buyers. Live internationally? No problem – we’re active in over 100 countries and every continent except Antarctica. 

Multiple Myths

Starting with common misconceptions, Andrew and Christian reveal why realistic multiples have little in common with those in the press and must be justified by your business and reflect market realities.

Highlights

• Multiples reported in the press are often the outliers and not the norms.
• Our job is to tell you what you need to hear and not what you want hear regarding valuations.
• We want you to have the right expectations so you don’t price yourself out of an acquisition.
• If you price too high, you won’t even get to buyer conversations that result in a better valuation.

Getting Your Multiple Right vs Getting It Wrong: The Effects

Since your best shot at a high valuation is making the right first impression, getting your multiple right can result in a fast and easy exit whereas getting it wrong could mean not getting acquired at all.

Highlights

• Negotiating from a high valuation down is usually NOT the best strategy.
• Price flexibly (up or down) to allow a faster exit, cleaner process, and a bigger cash component.
• If you have one buyer, you have no buyers, meaning no leverage to drive up your valuation.
• If you don’t price realistically, buyers will add big earnouts and other conditions to minimize risk.
• Unrealistic valuations usually mean less cash, fewer offers, and more conditions. 
• Pricing realistically draws more buyers and offers so you can leverage a better price and terms.

Why You Should Aim to Sell Quickly

Time kills all deals. Whether it’s a new competitor or a change in Google’s search algorithm, nothing can prepare you for influences outside of your control. The best time to sell is when you can.

Highlights

• The market changes quickly and can impact how much you sell for. 
• External factors like third party dependencies and emerging technology can also impact your exit.
• A good business always sells – the best time to sell is when you’re profitable and growing.
• Waiting for a better time to sell puts you at risk from outside influences beyond your control
• Deteriorating performance or a change in search algorithms can all have a big impact.

How to Choose Your Valuation Multiple

1. Establish a baseline using market data

Understanding the market is your first step in determining a multiple that maximizes buyer interest.

Highlights

• Start with the valuation tool or our most recent multiples report.
• Use averages to establish a baseline that you can adjust up or down based on your business.
• A realistic valuation gets you talking with buyers, leading to more offers and leverage.

2. Evaluate your goals and business

Andrew and Christian discuss what it takes to push your multiple higher and when sometimes it’s okay to accept a multiple on the lower end for a faster, cash-rich sale.

Highlights

• What’s important to you – why are you selling – how do the price and terms impact your goals?
• How quickly do you want to sell? How much cash do you need? How long a transition?
• Adjust your multiple up or down depending on your goals and the specifics of your business.
• Speak to your Acquire.com M&A advisor to discuss how to adjust your multiple.
• To justify a higher multiple, you likely have unique IP, operating 3+ years, low churn, and so on.
• But higher valuations usually mean a slower sale, more terms, and less upfront cash.
• Be upfront about your reasons for selling – surprises kill deals.

3. Apply Your Multiple to Revenue or Profit

Andrew and Christian discuss different scenarios in which you apply the multiple to profit or revenue.

Highlights

• Buyers usually focus on your profit first over revenue – bear that in mind.
• Applying a multiple to profit is most common, but if profit is low, consider using a revenue multiple.
• Consider also how buyers view your business – they want a return in three to five years. 
• Whether revenue or profit growth, buyers want that to continue so they earn a return.
• Consider how your multiple influences the buyer’s ability to earn a return on their investment.

How to Sell Your Multiple to Buyers

1. Prepare Evidence in Advance

Nothing beats preparation in making a great first impression on buyers.

Highlights

• Trust and credibility is paramount so ensure you can speak to every aspect of your business.
• You’re not just selling a business; you’re selling yourself. You want the buyer to feel comfortable.
• Ensure you’ve got all financial docs ready, including trends and failed/successful experiments.
• Be honest about your experience and limitations and how you expect buyers to succeed.
• Buyers are likely viewing several startups at once and your preparedness can speak volumes.
• Vet buyers just as thoroughly as they vet you before moving forwards – do they have funds?
• Your job during an acquisition is to de-risk the opportunity for buyers.

2. Use Screenshots and Documents to Make Your Case

Evidence, evidence, evidence. Build your data room, organize it, and watch the offers roll in.

Highlights

• A P&L broken out monthly for the last three years is essential.
• Connect Stripe or ChartMogul to reveal real-time metrics to buyers.
• Screenshot anything you can’t connect that may help buyers derisk the acquisition.
• We can help recast your financials to reveal more accurate performance data.
• Record a brief video about why you started the business, reason for selling, and so on.
• An introductory video that answers common questions can save hours of work before the first call.

3. Price Strategically to Attract More Offers

Strategic pricing is the number one plan to sell for more cash in less time. Andrew and Christian discuss how it works and why you should try it.

Highlights

• Startups rarely sell at the listed price – sometimes higher or lower – leave negotiation room.
• Work with your M&A advisor to select the best entry point to drive maximum interest.
• Find a middle ground between your exit goals and market realities to attract more offers.
• Price up to 10 percent below market averages and you can get up to 50% more interest.
• That said, pricing too low can also raise questions – the idea is to find a balance.

Closing Thoughts 

Andrew and Christian discuss the many factors influencing valuations and where to get help when the time comes to sell your business.

Highlights

• Valuations involve countless factors – never focus on one to the exclusion of another.
• There might be things that you don’t value that buyers do and vice versa.
• Your M&A advisor will play the buyer’s role when preparing you to sell for the highest price.
• Creative deal structures can help you refine your multiple.
• Your target buyer can also impact your multiple – strategic, financial, acqui-hire, and lots more.
• If you want to sell quickly or plan for a longer process, adjust your multiple.

Q&A

Where can I find multiples for startups like mine?

The best place to get a baseline valuation from which to adjust up or down is by using our valuation tool or referring to our most recent multiples report.

In your experience, is there a general revenue range (for SaaS) when multiples are typically based on revenue and not profit?

Typically, buyers only consider revenue multiples if you have low or zero profit but are growing fast.

I own a CPG company. How does that change some of the key points you brought up today?

Although our valuation data and pricing strategies are based on SaaS startups, many of the principles we discussed today apply to any type of business. For example, you should still start your valuation with a market-based multiple and adjust up for your business’s selling points and down for the risk factors. 

How does one best position a SaaS asking price if it’s built on open-source code? We have healthy metrics and steady growth but no true “legal” IP.

IP is just one factor that impacts your multiple. Other factors include market positioning, total addressable market, growth rate, churn, customer concentration, profit, revenue, and much more. If your code isn’t valuable in itself, how you execute your business using that code is – focus on this when negotiating your valuation with buyers.

How do you accurately evaluate non-subscription business models to a multiple?

You can use multiple valuation method for most online businesses, even if the revenue doesn’t recur. Without subscription-based revenue, however, buyers are less likely to pursue your business without some other positive factors to offset the risk of one-off sales versus recurring revenue.

Does Acquire provide support on legal entities when preparing for selling? 

Yes, we can guide you on this as well as refer you to companies to help you set up new business entities if required to sell your business. Speak to your M&A advisor for more support.

For B2B SaaS companies that are growing quickly but not breaking even, what data do you have on using a revenue versus profit multiple?

Our most recent multiple report is based on profit multiple only since that’s how most buyers value businesses in the current economic climate. That can change in the future. We’d recommend referring to earlier multiple reports for a starting point on revenue multiples.

Does acquire.com only get paid if I sell the business through it? What if I sell the business to someone in my personal network (totally separated from the platform)?

If you agree to sell your business on Acquire.com, you’re subject to the closing fee as per our Terms of Use, even if you found your buyer outside of the platform. 

How do we include other factors in the valuation other than revenue? Like brand, social media presence, reviews, customers, and so on. 

Beyond financials, how much the attributes of your business affect the multiple depends on the type of buyer you’re targeting. If you’re a developer and looking for a buyer with marketing expertise, for example, who you know can grow the business much easier and faster than you can, you might focus more on the opportunity, your total addressable market, and so on. The buyer can then evaluate whether the opportunity is worth the asking price.

Equally, if you’re a marketing expert but not so great at building tech, you might look for a developer who values the marketing setup that’s already driving results and can build new features to keep that flywheel moving. Every business is different and so is every buyer. The value you give each factor of your business can therefore vary from one buyer to the next depending on their goals and background.

How can I reassure buyers who’re driving my valuation down due to a third-party dependency?

It’s common to rely on third parties as your business grows, but you should also have built failsafes into your business model to ensure you don’t rely exclusively on a third party for revenue. If that’s not the case, maybe it’s time to think about how you could generate business without that third party. That might mean postponing your exit or explaining how your business can thrive without the dependency.

For example, maybe your business is dependent on the App Store, where changes could impact your business. If you can speak confidently to the level of risk and how you’ve built safeguards against that risk, buyers are less likely to push the price down.

What advice would you give someone who wants to sell quickly but at the highest purchase price?

To sell quickly and at the highest price, you need to start by pricing your business realistically to attract the most interest and offers. Then use a deal schedule to control the process. A deal schedule sets deadlines for different stages of your acquisition, which motivates buyers to make offers. By telling buyers you expect offers by a certain time, you ensure they arrive close enough together so you can compare them and then negotiate on the terms or price (but without playing them off against each other). 

You might also include a transition timeline in your deal schedule. If you’re in a rush to sell, you probably don’t have that much time to spend in helping the buyer get set up for success post-closing. Setting expectations early can avoid wasting time later and gives you space and time to work on other parts of your acquisition that make a shorter transition feasible. Conversely, if you do have more time to help the buyer, this can derisk the acquisition and make a buyer pay more for your business. 

If I’m in no rush to sell, would you recommend I wait for someone to make an above-average offer? A strategic buyer, for example?

Your M&A advisor will never push you to accept a buyer’s offer. That’s not what we do. We need to make sure you find the right buyer, price, terms, fit, and more so you’re absolutely confident about selling your business. If you’re in no rush to sell, you can wait for the right offer and buyer to come along, but we wouldn’t recommend waiting for a strategic buyer. You might think you have what a strategic buyer wants, but there’s no guarantee that’s the case. And the longer your business stays on the market, the longer it’s exposed to external and internal business threats that can devalue your business.

To be attractive to a strategic buyer, your business should be on its product roadmap or have some other synergies that a strategic buyer values. Maybe you can cut their time to market, give them technology they can apply to areas of their business, or help them expand into new territories. These types of acquisitions take a lot longer – usually years – to gather momentum, so you’d need to start the work now by getting to know potential strategic acquirers, their corpdev teams, and so on.

Since many factors influence the multiple, how do I know how much weight to give each one?

What would happen if I adjusted my multiple after listing my business?

You might adjust your multiple for many reasons after listing your business. Maybe you had a particularly good quarter, renewed some big contracts, or secured an enterprise client. Ensure you always have a reason. Expect a little back and forth on your valuation and remember it’s statistically unlikely that you’ll sell at the listed price anyway. 

Your M&A advisor will help you set up a living Q&A document to record buyer feedback. As you meet more buyers, your living Q&A will expand to the point where you always have an answer. It’s also a great source of truth – a litmus test – of your valuation. If the last ten meetings ended with buyers saying your valuation was too high, it might be because you haven’t explained the opportunity, assuaged their fears, or maybe you’ve overvalued your business in terms of market expectations.

But if you adjust your valuation, multiple, or asking price too quickly, buyers might assume you’re not really serious or dedicated to selling your business. Or if you have to reduce your price, maybe the buyer will expect you to drop your price further and will wait on the sidelines until you do. We recommend always doing your research, establish a market-driven baseline, factor in your value-adds, risks, and then speak to your M&A advisor before making adjustments.

How do market conditions influence the choice of a valuation multiple? And how would I know that it impacts my specific business?

Market conditions can impact your valuation multiple in lots of different ways. Right now, for example, buyers are hyper-focused on profitability above other factors. Every business is different, however, and to understand the impact of market conditions on your valuation, you must start from the beginning. Use our valuation tool or our most recent multiples report to tell you what similar startups sell for and then adjust up or down for the value and risk factors specific to your business. Your M&A advisor can help too.

---

The content on this site is not intended to provide legal, financial, or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.