What's My Startup Worth in an Acquisition?

The value in our startup in an acquisition is usually a fraction of what we think it is — not a multiple.

That's not because our startups lack value; it's because we often misunderstand how that value actually gets calculated. In the past 30 years, I've spent a tremendous amount of time on both sides of these transactions, both as a Buyer (we bought 6 companies at Startups.com) and as a Seller (I've sold 5 of my own companies).

What I've learned is that Founders have really unrealistic expectations of how our startups are valued at the time of a sale. Frankly, it's not because we're not smart, it's because there simply isn't a lot of guidance on how startups get valued at all.

The White Knight Fallacy

We often picture the sale of our startup to some White Knight that conveniently looks past all of our issues and only wants to pay a massive premium for what believe are our best assets. We start developing these fantasy lines like "They will buy us for our data!" or "The product is so good that the fact that we make no money won't be an issue!"

I call this the "White Knight Fallacy." Not only do we build this fantasy situation that's essentially totally insane, but we then start setting our expectations around it. Sometimes, it's not the Founders creating this fantasy, but the investors who conveniently want to believe the White Knight actually exists because they want their return.

The problem with the White Knight Fallacy is that it sets our expectations into a realm that cannot be achieved, and, therefore, kills our chances of getting a deal done before they even start. That's not to say we shouldn't seek out a fair deal, but we can't just make shit up about our value and pretend the world is going to buy it. That might work for investors, but it surely doesn't work for buyers.

Multiples of Madness

We also get incredibly stuck on how we actually value our startup. When we speak to Founders, what we hear most often are "multiples of revenue" (if there is any revenue) as a starting point. And while it's true that multiples of revenue can be calculated to find a sale value, how we tend to assign those multiples often comes out of nowhere.

Let's say our business is doing $1 million in revenue on $100k in profit. We might say "We think the market is offering 10x revenue multipliers for companies in our space." And while that might be true (it's usually not), what we always overlook is that the companies that may have gotten those multiples aren't doing $100k in profit.

Think of it like this — if you had $10 million in cash to invest, and you could put it into the S&P 500 and make 12% (or $1.2m) why in the world would you invest $10m in a company to make $100k? Also you'd have little to no risk or work (historically speaking) to get there. We have to remember that we can't just make up multiples — we have to price ourselves as competitive to other assets.

Cash or Monopoly Money

Even if we can come to terms on a deal, that doesn't mean the money we're being paid is always the same. The difference between cash and "future value" is massive on a sale. I tend to call anything but up-front cash "getting paid with Monopoly money" which simply means it may be worth nothing.

When we're thinking about how we're going to get paid, the more value we push into upfront cash the lower the overall purchase price is going to be, and vice versa. At this point, we're expecting "all cash up front," and we're specifically competing with 12% of the S&P that could otherwise generate with the same money. The only reason a company would pay all cash up front is if their return could exceed what they'd make elsewhere.

That leaves us with getting paid later — which can easily mean not at all. Earn-outs, equity swaps, and deferred compensation rarely pay out as expected so any money we don't get up-front is always in question.

When it comes to selling our startups, we're not fighting against the cash value as much as our own (often misaligned) expectations of what our startups are actually worth. If we're sober about the value, we're less likely to get drunk on the price.

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