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BUY OUT: How to find fair market multiple and value

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RayAndré

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Hey all,

So my partner and I disagree on the future path of our business and I asked if he would like to buy me out. He's willing, so next step is to get a valuation of the business and agree on a fair price.

So...what is the best way to evaluate our business? Specifically:
  • What multiple is fair? Why?
  • What do we use the multiple on? (Revenue, profit, etc). Why?
  • Any other factors that would increase or decrease the value, multiple, etc of the business.

Naturally, he's going to want to pay me as little as possible and I'm going to want to get paid as much as possible.
So I guess its a matter of agreeing on what "fair" means.


Anyway...here are some details of the business and then I'll get into the questions I'm looking for:
  • I'd call our business a "micro SaaS"
  • Our products are "micro applications" we sell for a monthly subscription on a niche 3rd-party platform.
  • We've been in business 7 months
  • Our profit margin is very good.
  • Under the hood, we're a separate entity, but from a public/brand perspective, we're a branch of _his_ personal brand

And some questions I'll be researching to get started:
  • What is a typical multiple for our type of business? How would I find it?
  • How does technically being a "start up" effect our valuation? Sounds like most of the big name brokers don't deal with startups...therefore making it more difficult to get advice on a valuation.
  • What needs to be written in a buy-out contract?
  • What payment terms are fair? All up front? X% down then a monthly payment plan? How does this affect price?
  • Is there an escrow service we can use for when we get there?

I'll update as I go and find some answers.
 

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amp0193

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Short answer: Comparables. You need to see what other companies like yours have sold for. Like selling a house.

For something like micro SAAS, there might not be a whole lot of public data. These are probably small, private transactions that wouldn't be tracked by Crunchbase or others.

I'd suggest talking to some business brokers who specialize in this area and get their thoughts on the range of multiples they are seeing in the niche, and what factors go into a business being on the bottom and top of that range.

Then evaluate your own business using that criteria.


For all the other questions... you guys need to get a lawyer that you both trust to mediate. Someone who deals with startups.
 
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RayAndré

RayAndré

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Thanks @amp0193 , yea this is going to be a weird one to find someone with specialty knowledge for valuation...too many gray areas & blurred lines between our biz and his personal brand... its the main reason why I want to get out.
 
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RayAndré

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Online escrow service, cool

...or I could use an attorney it sounds like.
 
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Davidla

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A few ideas that can help here:

-businesses with more track record you could pretty easily get a range for the valuation/multiple.
For examlpe, SaaS businesses on EmpireFlippers, FEI etc I normally see at 3-4X yearly profit multiple.

-You can look at a range that is between the above, and the "replacement" or "sweat equity" cost that you've put in. For example, how much would you have to pay someone with your skills to do the work you've put in the last 7 months? How much would it cost to hire a team to create this from scratch?

From your end, you can make the argument that the yearly profit doesn't yet represent the work that you've done..and so you also need to add to that some of the sweat equity you've put in.

-Terms --> this is negotiable. Personally, I'd ask for extra if you were "seller financing" a part of it, as you are taking a risk here.

Keep us posted.
 
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RayAndré

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thanks @Davidla

yes from what I've been seeing in the various articles I've been reading, I believe a multiple of around 3.8x would be fair.

the next question I would want to answer, is what do I use to multiply it?

yes, yearly profit, I agree on that.
but how do we calculate yearly profit when we've only been around 7 months?

do we average all 7 months? this gives the lowest number.
or do we use the latest 1 or 2 months average? this would give a higher number.

the numbers vary significantly.
is it fair to use all 7 months when the first couple months were still on growth phase?
 

AgainstAllOdds

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Short answer: Comparables. You need to see what other companies like yours have sold for. Like selling a house.

For something like micro SAAS, there might not be a whole lot of public data. These are probably small, private transactions that wouldn't be tracked by Crunchbase or others.

I'd suggest talking to some business brokers who specialize in this area and get their thoughts on the range of multiples they are seeing in the niche, and what factors go into a business being on the bottom and top of that range.

Then evaluate your own business using that criteria.


For all the other questions... you guys need to get a lawyer that you both trust to mediate. Someone who deals with startups.
This.

The multiple is likely 3-5x your current income. Considering that it's a startup, I'm not sure how much money you'll get.

I'd look at a fair market rate for your efforts and put the number around there.
 

AgainstAllOdds

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the numbers vary significantly.
is it fair to use all 7 months when the first couple months were still on growth phase?
And no. You don't look at the first few months.

Look at today's earnings. If the expectation is that they'll be growing with no risk, then last month is what you'll be multiplying by. That's because it's fair to assume that your partner will increase the profitability over time since it's unlikely that there will be a high churn rate.
 
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RayAndré

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And no. You don't look at the first few months.

Look at today's earnings. If the expectation is that they'll be growing with no risk, then last month is what you'll be multiplying by. That's because it's fair to assume that your partner will increase the profitability over time since it's unlikely that there will be a high churn rate.
Got it, thanks for that @AgainstAllOdds !
Any credible resources you could point me to that say this (so if he tries to say differently then I have proof)? In my research I haven't yet found something specifying this.
 

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gabomur

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Hi @RayAndré

A few questions:

1-How much capital did you put to get the business started?
2-Did you raise money or is bootstrapped?
3-Are you 50/50 partners? Technical or sales roles?

I'm new to the forum but based on my experience of selling my business last year with FE International. I can tell you there is not a reliable standard to reference a valuation for a small business, especially such a young company.

Plus, brokers do a TERRIBLE job on doing valuations.

I had to hire an independent CPA advisor after I received my valuation from the Broker.

Yes, there are a bunch of theories out there on valuations, but I can tell you they don't matter much at the time of closing a deal.

"A business is worth exactly what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller in the open market."

It sounds like even though there are seven months of data, it is not enough to show the potential of the business you built. However, trying to do a valuation on future value is not fair either.

Finding a simple compensation for your sweet equity-like @Davidla recommended may be a better path for both you and your partner.

I would be happy to share my experience on Zoom with you and chat more about the specific number and go over the questions you posted above. (then we can report back here for others to learn as well)

Unless you raised capital, getting a GOOD CPA, lawyer, and other advisors, it might not be worth the effort.
 

MattR82

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I just launched a very very MVP/Beta version of my self-built web app to help start-ups with valuation & fundraising.

www.evalquity.com

The downloadable report is still in the works, but the actual valuation logic/method is close to completion.

It basically uses 7 different valuation methods ranging from qualitative start-up methods, market multipliers against earnings, and technical discounted cash flow methods used by bigger companies.

Let me know if this helps in any way. I appreciate any feedback. Cheers!

P
So the exact same tool as the guy a few posts above yours lol.
 

gryfny

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And no. You don't look at the first few months.

Look at today's earnings. If the expectation is that they'll be growing with no risk, then last month is what you'll be multiplying by. That's because it's fair to assume that your partner will increase the profitability over time since it's unlikely that there will be a high churn rate.
I would go even further, and say to base the value on the future earnings. You're not selling yesterday, you're not selling today. You are selling the future of the company, and it's future earnings. The problem is that you and your partner might disagree on the potential of the future earnings.

I used to be in M&A, and we would estimate the value like this:
+ Value of assets
- value of liabilities
+ all future earnings discounted over time by a specific factor. This factor depends on the country, the size, the industry etc.

We of course do sanity checks by checking the business multiples that we can find. Also we check the price of comparable businesses that have been sold recently.

What I would recommend is to go and find a valuation firm to do an independent valuation. Maybe find a party that is neutral to both of your. If you both have your own valuation expert, the processed will be very lengthy and costly.

If you can't or won't do this because your business is too small. Multiples would be an okay alternative. But be wary of profit multiples, those are (especially for small businesses) very dependent on what salaries you have decided for yourselves and it's quite easy to manipulate profit. Revenue multiples are my opinion the best, since they are less easy to manipulate and show the potential of your business.



"A business is worth exactly what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller in the open market."
And this is of course the ultimate truth. Sometimes buyers would pay a multiple of our careful valuations. You might want to try and find one or more potential buyers to get an open market estimate.
 

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