Angel Investment Journal – Angel Investing and Entrepreneur Blog

Valuation for an Exit

Posted in Acquisitions by angel on the January 31st, 2007

I have had experience in selling a company, but even after going through that experience, the only thing I learned about valuations is that they are very difficult to determine. There may be formulas out there that are based on industries, but it still widely varied depending on the deal.

One reason is because value is largely based on what it is worth to each party. If you are selling a company because you have a large motivation to get out of the business (for example, you met a hot, young Brazilian that wants you to move to South America with her) and only have one interested party, it is unlikely it will be valued as highly as if the owner is not motivated to leave the company, but there are 3 other companies bidding to buy it.

Another reason is that there are so many factors in determining value that it is not possible to weigh all factors as the same between two companies, even if they are in the exact same business. For example, Company A and Company B could have the same number of customers, revenue, and profits. But maybe Company A has had it’s customers for 20 years and has relied on them for all of their revenue whereas Company B just started 2 years ago. Company B may be worth more since it has much higher growth, but maybe Company A because it is much more stable. Regardless, it is not possible to value them the same with just a simple formula.

There are some things that can help you determine estimated values, which is nice because even coming up with an estimate is difficult. I just spoke with Jay at GrowThink and he explained one of those concepts. He said if you have a smaller company, with profits below 7 figures, it is likely considered a lifestyle business. This is the type of business someone would run in order to make a living. These companies would generally sell between 2-3 times earnings. Whereas a company with 7+ figures earnings is likely to be valued much higher since investors would be interested in this type of company. These companies could be valued between 6-8 times earnings.

“The larger the company, the higher the multiple”

Again, this cannot be categorically applied to all business and industries, but it is a general concept on where to start. Yet many companies sell that have negative cash flow. As you have seen from many acquisitions, companies that are losing money are selling for millions and even billions. These companies are valued based on future expectations of growth and additional forms of monetization.

I expect to post (probably multiple times) in the near future about valuations for a company when related to getting funding, which is a totally different ballgame.

15 Reasons Why StubHub Loves eBay

Posted in Acquisitions by angel on the January 15th, 2007

I am sure you have heard about eBay’s acquisition of StubHub for $310 million. The funny part about it is that they were in discussions over a deal in 2002. eBay almost paid $20 million for the company until the deal fell apart because eBay thought that was too much money.

Four years later and 15 times (the original price) greater, they finally came to a deal. I think this just goes to show a couple of things:

1) Big companies are more willing to pay big money for leaders in a category as opposed to building something on their own. They would rather spend $300 million buying a leader compared to $20 million for an up-and-comer, but unproven leader.

2) 2007, like 2006 looks to be a great year for companies looking to get acquired. IPO’s are still not back in vogue, but the economy has been doing well so people and companies want to invest. Since the Real Estate Market has died down, private equity has continued to grow.

StubHub was funded almost exclusively by Angel Investors. They had one round of VC money.