YC Help: I need Acquisition Advice

https://news.ycombinator.com/item?id=130228

by nextmoveone • 18 years ago

53 38 18 years ago

news.ycombinator.com

The company I am a part of is in talks with another company and I am wondering if a 3-4 times earnings buyout would be fair?

Some background: the Start-up is 8 months old, and is primarily e-commerce based with plans to move into corporate and retail avenues. The growth has been exponential, and we have been profitable since 2 months after launch, with profits growing at least 110% each month (ie, we were profitable 16k one month, then the next we were 35k profitable, last month we hit 160k in Net Profit).

P.S. - Market Size: Every Internationally Traveling U.S. Citizen.

P.P.S. - I would not stay after the technology integration and neither would half of the employees.

dfranke• 18 years ago

That sounds like a very low offer. A 4:1 P/E ratio is what you expect from a steel company, not a tech startup showing exponential growth.

jorgeortiz85• 18 years ago

Right. If your growth really is exponential, then drag out the deal a month or two, at which point their valuation is so outdated they have to make a new one.

mrtron2• 18 years ago

At which point you are still getting a crappy multiple?

If your growth is really exponential...that should be an additional 10x multiple. So, 30-40x multiple overall.

DavidSJ• 18 years ago

Actually, a steel company gets about 15: http://finance.google.com/finance?q=NYSE:X

Established high-tech companies like Google or Apple get 25-35 if good growth is expected.

They're trying to rape you.

brk• 18 years ago

Like most everything else, "it depends".

Do you have revenue? What the COA vs. TLV for each customer? What's the market? What's the growth potential? Do you have a better than average chance of success if you make a go of it on your own? Do you potentially have blocking patents that this other company might need? Could you get funding on your own?

(Yes, I know you answered some of these questions above)

3-4 times is nothing spectacular, really. 10x is usually getting in the range of very good, but there is no static multiple that applies universally.

aneesh• 18 years ago

Depends on many factors, but here's simplifying greatly: 3-4x is pretty low. A good deal might be 10x, and if you're facebook, you get 100x.

daniel-cussen• 18 years ago

The deal sucks. You're getting screwed. Net present value is a lot more than 3-4x profits. You could get a much better deal almost anywhere.

BTW, I haven't heard of anyone doing this, but you could look into NASDAQ portal. It's about 8 grand to register and is pretty similar to an IPO, but without Sarbanes-Oxley requirements. But, again, I know very little about this process.

nextmoveone8• 18 years ago

Thanks for that one!

asdf333• 18 years ago

Having sold two sites: the first a website and the second a company.

At your size its all about how much they want you ans how much you want them. Step into their shoes for a while and see what they see. Do they see a 10 million dollar a year business if they roll it out throught their sales channels? What value do they see? Position it from that angle. Don't fall for pe ratios or crap like that. Its one thing if you are a solid stable company w/ predictable revenues but you are not. Be polite but firm. Don't let them pressure you. If you need more time, tell them you are taking more time. They'll try to rush you.

Finally, as you are doing this, think HARD about involving some professionals. Lawyers to help you get favorable terms, tax ppl to help you understand the tax implications (there is a GAINORMOUS DIFFERENCE between long term capital gains and short term). I know its difficult since they cost an arm and a leg but you can me losing out on a lot if you don't get some advice. Reach out to you uncles cousins buddy. Everyone likes helping the young kid trying to fight the corporation. They'll give you some free advice esp if its a favor.

Don't be afraid to ask for help and advice! We live in a society. People will help you out.

Finally, if they really want you, they will be back, no matter what they say. Think hard if this is really what you guys want. But as hard as it is, also be stone cold and make some probabilistic calculations. I'm sure it is a passion, but its also a business transaction. The irrational guy loses.

fendi• 18 years ago

http://news.ycombinator.com/user?id=nextmoveone nextmoveone how do i reach u?

nextmoveone8• 18 years ago

trying to keep company names off the net as well as my name... so do ycnewsid456[at]mailinator(dot)com

ash• 18 years ago

It's strange to use Mailinator for contact... Everybody can check your box there!

pistoriusp• 18 years ago

How come?

rms• 18 years ago

Do you really want to sell? It sounds like you could make more money if you stay around and try to keep scaling. But if you really want to focus your attention somewhere else, sure, sell for whatever you can get.

How long do you think you can keep the exponential growth up? Another couple of months? Or do you think your company can really dominate the travel (or whatever area you're in) marketplace?

nextmoveone8• 18 years ago

I say growth will peak in 6-9 months.

Flemlord2• 18 years ago

Peak, or level off?

mrtron2• 18 years ago

OK, so assuming your current offer is 5-6 mil...

This months net profits - 160k If you can sustain your 100%+ growth monthly for the next 6 months, you could hit a huge monthly profits number. Even with 50% growth, your monthly profits would be over a million with that kind of growth.

Which makes your current offer very low, this is why with that kind of growth people get huge multiples.

webwright• 18 years ago

As a guy who sold his last business to the first offer (which was a good one, but not a great one), I would encourage you to think VERY hard about what happens after the sale. Are they hiring you? If so, how are you going to like that? I hated it.

If they're NOT going to hire you, what are you going to do next? It doesn't sound like you'll have enough money to retire, which means you get a job or start something new.

You have an incredibly unique opportunity RIGHT NOW. Many entrepreneurs try multiple times and NEVER make something people want-- you may never do it again (there's a helluva lot of luck involved).

So, if I were you, I'd keep growing it unless you think it's a short term play or that it's going to quickly plateau.

Even if you ARE going to accept the offer, COUNTER. Say, "We think we're worth a lot more than that-- we'd like to see a better offer."

mixmax• 18 years ago

If I could upmod you twice I would.

From a man who has actual experience in the field.

nextmoveone8• 18 years ago

I'm 21! Retirement!?

Points taken. Very much appreciated.

jey• 18 years ago

Yeah! Since once you retire you can work on whatever you want, instead of only working on things that produce money.

goodgoblin• 18 years ago

Hey - no matter what happens - congratulations! Also - if you could post how it shakes out - anonymously of course - that would be great. Best of luck!

Flemlord2• 18 years ago

With a more mature company, the valuation method is fairly straightforward. The ratio depends on your industry. Find a few equivalent companies and average their PE ratios. Then subtract somewhere between 20-40%, depending on how new/mature your product and customers are. Multiply it by your current earnings (on a run-rate basis). That's the fair price.

If you aren't profitable yet, you can do the same thing with the Price/Sales ratio, although that's more subjective and less accurate. It sounds like you may be new enough that all of these methods are out the window, and your valuation is based purely on your hotness and growth potential. In that case, I don't really know what you're worth. The only way to establish a fair value is to get a bidding war going.

Actually, if you are truly on an exponential growth vector then 3-4x earnings sounds low. Why would you even consider it? In a year, you would have earned more than you would have made by selling the company. Is there any reason to think your earnings have leveled off? Also, is this a cash or stock deal? Is the payout no-strings-attached or is there an earn-out requirement with target revenues?

srp• 18 years ago

don't sell at 4x. This would be a ripoff. Stay with the company and see if you can grow it further. If you really want to sell ask for 15x or more.

jdavid• 18 years ago

sounds like the offer is 6M-9M

to put things in perspective.

@ 10M and 3% you earn $300k a year in interest. @ 10M and a good money market you earn 8-12% or $800k-$1.2M a year. If you only spend 250k a year you will grow your money very fast.

in Wisconsin 1.5-2.5M and 150K a year in income qualifies you as an angel investor, and you can invest 100k and get 25k off of your taxes.

i think the guys are right, 10x is standard for tech growth.

you might consider a few options to the deal, like a payout bonus if the company performs better than X a percentage payout of lifetime earnings of 1% annually (which will keep you from being broke) technology licenses are normal. *the buyout price is for control, but not for all of the ownership, you might retain some shares which could be sold later.

dkokelley• 18 years ago

Hmm. At your current position I would seriously consider the lifestyle options you currently have. How much are you earning currently from this? Are you the only founder? If you can take a 6 figure salary from this and still pay all business expenses and be profitable then I would reconsider selling, especially at such a low valuation.*

*Quick note/question: You're saying that you hit 160K net profit last month, and that you're being offered 3-4 times earnings. Depending on your gross margins you're being offered at least $7.7M (assuming no change in monthly net profit). What are your earnings, might we ask?

If you have very tight margins (<10%) then I think this is a great deal, technology and speculation aside. If you have a high margin (>50%) then it probably isn't such a great deal.

Things to consider:

- How much of the buyout goes to you?

- How much are you personally making now?

- The average American (depending on education) earns about $3M in his/her entire lifetime. Will you have this or more after the deal? (This is a little test I apply to see if I would do or not do something).

- How risky is your company?

- How much risk are you willing to take?

Good luck with this. Congratulations for getting this far!

xirium• 18 years ago

> How much of the buyout goes to you?

> How much are you personally making now?

If you get less than two years of salary then declining the offer would be the best option.

bijan• 18 years ago

I agree with the above comments. 10x is standard for tech companies. And if you have seen such phenomenal growth, why sell now? Do you feel you cannot sustain such growth? I would say take those profits re-invest in yourself and try to reach targets that will warrant a better buyout.

SamanthaG• 18 years ago

As a lawyer, I would advise you to consider your options with an accountant or lawyer

fleaflicker• 18 years ago

Nobody here can gauge the fairness of the price. You (should) know your market better than anyone else.

wisernow• 18 years ago

On the face of it, this would look like a very bad deal. But I feel there must be more to it.

The OP does now YC, know the culture here, understands valuations. Why does he/she even consider selling for 3-4x earnings (i.e profit, not revenue). There must be something about the business ...

Prrometheus• 18 years ago

We see 10x multiples in the low-return, low-risk financial space.

YC Help: I need Acquisition Advice

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