What is Your Startup Worth?

An article we liked from Thought Leader Joe Procopio:

Let’s Figure Out Your Startup’s Valuation

There are formulas and market multiples. Then there’s what someone is willing to pay.

Tell me what your startup is worth. I dare you.

There is no murkier exercise in business than figuring out the valuation of a company. This is especially true when the company is a startup.

You can do a search for how you might value your own company, you can even ask ChatGPT, and I’d be willing to bet that you’d be overwhelmed with valuation methods and formulas that base company value on everything from revenue to EBITDA to social media followers.

I did not make that last one up, but please don’t use it.

I’ve sold companies that had little to no revenue at sky-high multiples. I’ve also run into brick walls trying to get an acquirer to value my company more than prior year’s revenue. It can drive you to distraction. And it can also lead a founder to make big financial mistakes.

As you might imagine, the only person who can tell you what your company is actually worth is the person writing the check to buy your company.

But let’s figure out a better answer.

“I Would Love a Big Exit”

I got a great question from a founder whom I would already call successful. They’ve built a lot of automation, so they have a small team. They have valuable proprietary IP. They operate on a subscription model, so they know their CAC and LTV and can forecast growth relatively accurately.

They will generate $1.5 to $3 million this year on greater than 50 percent margins. They believe they can grow at least 50 percent year over year over the next three years. At that point, the founder, who has been doing this for a while, wants to sell.

One problem. Even though the company seems to be printing money, they don’t want to get lowballed on the multiple.

“I see so many variations from 4x being high to 8x being super, but then I see companies publicly trading at 40 to 80x, so it’s a little confusing. Everyone I ask has a very different answer. It seems like it’s just a crapshoot as to how strong the economy is, whether acquirers are in buying mode or not, and if the acquirer is buying for income or growth. At this point, all I know is if I have a solid business that runs without me and makes crazy money. I will for sure get 4x revenue, but how do I get 8x or 20x?”

My answer is: Yes. You’re right about all of that. So let’s take a breath.

Why and When Do You Want To Sell?

Just to be clear, this is not financial advice and it’s based only on my own experience. You’ll want to engage with an attorney who specializes in M&A at some point, and a good one will have more data than just my data.

My first thought is the obvious one: Why do you want to sell?

I don’t mean to get into your personal life, and I’m sure you have a valid reason, but from what you describe you sound like you’re running a business that’s a perpetual motion machine and doesn’t take a lot of your time. So I ask because if you’re not being forced or pressured to sell, you’ll want to put together a timeline.

When founders come to me and say things like, “I need to sell my company right now,” I’m like, “You’re kinda screwed.”

This is because the primary factor in getting to your valuation — beyond all the formulas and multiples — will be your leverage position when you sell. If you don’t have to sell, you have more leverage, and ideally, you’ll want to be on the radar of several potential acquirers so you can use that leverage to get a better price.

When I sold ExitEvent, a startup networking and information source, back in 2013, it was very much a public-facing entity. I was waving away acquisition interest almost from the beginning. So when I did decide to sell, a decision I made to be able to spend all my time working on a much bigger startup play, I already had a group of four potential buyers I could go to. Two of them turned out to be serious, one of those turned out to be perfect.

It still took about four months of negotiation and another two months of lawyering.

So the timeline should start now.

What Deserves Higher Or Lower Multiples?

In my experience, most acquirers will use last year’s revenue as a baseline. But what they are mainly looking for in terms of a multiple is year-over-year (YoY) growth, and the number they’ll fixate on is 100 percent.

In other words, you want to be doubling revenue every year. Now, this is usually a standard for pre-profit or pre-EBITDA companies. Once the company becomes profitable, it makes sense to forecast revenue growth at less than 100 percent — still high, mind you, but less than 100 percent. Instead, you’ll want to be pushing to grow EBITDA at...