There are 4 company valuations for every Internet service company
I have been discussing Internet service company valuations for over 20 years and what I realized a long time ago is there are 4 valuations for almost every Internet service company.
1) There is the valuation that the company CEO/owner has in their mind.
2) There is my valuation opinion … which other than deciding if I will accept the sellside assignment, is not very important because I am neither the seller nor the buyer.
3) There is the valuation range that most prospective buyers will come up with.
4) There is the valuation that the top 1-3 most logical and synergistic buyers will come up with as they discuss the seller’s company behind closed doors.
While valuation #1 above might be a financial requirement for the CEO … #3 & #4 are the only realities in terms of a transaction occurring. Focusing on receiving valuation #4 is the key to all successful company merger and divestiture strategies. The steps to receiving valuation #4 are to identify, engage and educate the greatest number of logical buyers.
Side Note: The guaranteed way to receive a low offer for the company is for a CEO/owner to only approach the easiest 1-2 buyers and force a sale to one of them … yet business owners do this all the time. Why do they do this? Because they are either uncomfortable with the divestiture process, not aware that there are far more buyers interested in acquiring their company than the 1-2 buyers who approached them first, and/or they don’t want to send a signal to the market that their company is for sale (even though there are ways to minimize this).
Identifying the logical buyers is only one of the hurdles, communicating one on one with the corporate M&A strategy decision maker at each of these acquiring companies is the next hurdle.
So who is the real M&A strategy decision maker at a tech company? … who has the power within the company to actually make the company acquisition decision?
Many times I reach out to 4 or 5 of the top strategy decision makers at each company to make sure I reach the true power center of the company … and to increase the probability that an in-house conversation about my sellside client’s company occurs. Of course typically the main strategy decision makers are the CEO, President and Chairman but sometimes in the technology space the founder of the company chooses to sit back from the spotlight in the CTO/CIO/CSO role … so I make sure to engage them as well.
Back to the highest valuation
When valuing a company, we all place greater or less emphasis on each of the typical variables such as: revenue, profit, customer base quality/growth/trends, fixed assets, IP, product/service strategies, management, employees, vendor relationships, on and on. Similar to conversations regarding religion or politics, one person rarely changes another person’s valuation opinion very much, especially if they are on the other side of the negotiating table. But what is missing from many valuation conversations is the aspect of the value from the buyer’s perspective. The value for the buyer depends on what that specific buyer is going to do with the company post closing … and many times this is unknown to the seller.
In many industries, not all, the same business can logically be worth a 100% greater valuation to some buyers than others … so while there are always a few “low ballers” in the buyer pool, most buyers can be correct in their valuation opinion yet be far apart from the top 1-3 bidders.
In closing, it is in the seller’s best interest to identify the greatest number of potential buyers, educate them, be polite to the low ballers, follow up with the runner ups to ensure understanding, and respect the #1-3 bidder’s time.
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