Fascinating. I just messed around in Excel to see what the DCF discount rate would be, and it's exactly 25% discount to get to the 3x number.
Also, it is extremely difficult to sign an NDA just to inquire more about a sale as feinternational does not give any details upfront. Totally understandable that the company in question wants to maintain its privacy, secrets etc but this is a difficult situation. How do we move forward without knowing more about a company but they want you to sign NDA even without giving any details.
Think about it: I have this company for sale but I won't tell you which one it is until you sign this document.
What's is there to lose for the company to have its name spread to those that might be interested?
It's not like they're advertising the name in the NYT or making it public other than on a one-to-one basis with leads and those leads are definitely not going to publish the name if they're really interested because the last thing they need is more interest from others.
Public listings increase the number of copycats the end buyer will have to deal with. This isn't much of an issue for a well-established company with significant market share, but it is for a young software company fighting it out with their other (early) competitors.
if you're making 33.3% of $50k-$500K per year... the very top end of that is close to what you'd get working for someone else, and usually you don't have to put down a half million to get those jobs.
So, while I don't think I'd sell you my company for 3x SDC, I completely don't blame you for wanting to pay less than that. It'd really only make sense if you were sure that I had things setup to the point where I didn't have to do any work (which is something I can deceive myself about... I don't see how you could get a solid answer out of someone who had an interest in deceiving you.)
If the business can run without any input from the founder a) why would they sell it? and b) if they did they would sell at a much greater multiple.
1) sudden financial hardship like hospital bills
2) a divorce court judge ordered it
3) a non-founding owner has no emotional attachment and wants to switch to another investment.
Online companies that produce passive or near-passive income are bound to become obsolete quickly. The internet moves quickly in a lot of niches. The potential lifespan of the business affects the multiple.
But it's just plain wrong to think that you can look at the current numbers and assume they will go forward without more input from the owner.
I would argue that the whole idea of 'passive income' when combined with the idea of a 'small business' is a little flawed, or really, a lot flawed. Owning a small business is not like owning stock in google. You are an active participant in the business. A small business owner is fundamentally different from someone who owns shares in a large corporation.
I kind of like using marxist terminology for it. We are bourgeois[1]. We are not full members of the capitalist class; we still need to combine our labor with that capital, or else it's all gonna go to shit pretty fast.
But the real takaway you need to understand is that owning a small business is not at all like owning stock in a large business. It's a completely different thing, and your return on investment capital should be very different (and in my opinion, much higher.)
[1]no, not necessarily in the 'poor taste in lawn furniture' sense. I don't even have a lawn.
If I had to come up with something... Risk that the business fails. Some would rather take $200k than hope a $66k income sustains in 2019 and beyond.
And liquidity, although it's usually not terribly difficult to borrow money if you're cashflow positive, it can be very nice to get $200k today to jumpstart an even more promising business or jumpstart a mortgage, instead of delay that for 4 years.
In business it's a bad idea to deceive business partners or to sign an agreement intending to ignore it. Your reputation will catch up with you, and don't be surprised when you get sued.
With interest rates so low, it seems like businesses with recurring revenue that can recoup their costs in 3 years are a steal.
If you're looking to sell and walk away from a founder-run SAAS startup 3x is about right.
Add multiples if you have employees, long term contracts, significant market share etc etc.
http://www.startupsfortherestofus.com/episodes/episode-197-h...
I have a website that makes quiet some amount of money (at least according to my own criteria) and out of the blue I have been contacted by a so called buying/sellin sites company, named Hautesite, on behalf of a potential client interested in buying my website.
Ever heard of Hautesite? Their french website is http://www.hautesite.fr/, they say they are from the UK and are big in the UK (but no website to be found). I was wondering if it was a scam?
I even got into a Skype call with one of the employee who seemed very professional and so on...
But still... a buying and selling sits business with NO website in english, no social network, no presence on social media... I find it very strange.
Thanks in advance for your help :)
Nicolas.
Why would i sell my business at 3x SDC (which, if it's a small one-person shop, probably just 15-20 months' worth of all 'take home money')? Only if was a 'crap business' as said, and i know it is heading straight into the ground and can somehow conceal it from the buyer.
I've worked at a few companies where we've been sold to VCs and the like.
Anything more, and the risk of no recuperating the invested money is too great. (unless you find a sucker to dump it on, which is basically the current buisness model for most of silicon valley)
The SDR calculation [1] excludes compensation and looks like a generous net revenue measure. Earnings per share -- from which P/E multiples on public companies are typically calculated -- includes compensation, interest expense, various non-cash adjustments, and adjustment for dilution.[2] Generally you would expect the SDR number to be higher than net income and correspondingly attract a lower multiple in estimating firm value.
As others have commented, there are additional reasons why valuation metrics for large-cap listed companies don’t make for useful comparison with SaaS startups. See also Heidi Roizen’s cautionary tale [3] about the perils of multiple envy.
[1] https://news.ycombinator.com/item?id=9589223
[2] https://en.wikipedia.org/wiki/Earnings_per_share see also ../Net_income