21–30 of 33 posts
Earlier quoted context omitted.
Yes, service companies usually sell for 2-3.5x annual recurring revenue (ARR), which is measured by averaging your last 3-5 years of revenue. And you'll need to be easily replaceable.
Recurring revenue or profit?
I'd pay more for a business doing $500k in revenue with $250k profit (50% margins) than a business doing $1M in revenue with $100k in profit (10% margins).
In the text the author discusses also selling the company outright - question: how does one calculate a price for this usually? A few years' profit?
A small (sub $1m in annual revenue) services company will typically sell on some multiple of "seller discretionary earnings" - basically; how much cash can the owner operator take out in a year (including their own salary). A "typical" multiple would be 2-4x SDE.
A larger services company will typically sell on some multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). The main way this differs from the above is that the owners/CEO salary is not included. Traditionally the multiples here has been 4-6x EBITDA (which is what a "value oriented" private equity fund will seek to pay), but recently there is so much dry powder in the private equity world that those multiple has been pushed up, particularly for technology companies. 6-10x is not unheard of, more is possible.
A product or software (especially SaaS) company might sell on a multiple of gross revenue instead of earnings. Depending on how profitable the company is, this may or may not be a higher value than the above EBITDA multiple. Above a certain size, I would expect a SaaS company to sell for at least 3-4x revenue, more if growth is strong, even more for larger businesses.
In general you'll see multiples go up for a) strategic fits for larger acquirers (eg they can sell your product to their existing customers) b) growth and c) larger revenue companies.
This latter point might be confusing - why would a larger company not only get a higher price because the earnings/revenue is higher, but also get a higher multiple of that revenue? This "multiple expansion" occurs because there are (lots) more available capital to buy larger companies. Smaller companies are riskier and also the transaction and other costs (operating, optimizing) are similar for a $100m vs a $10m deal. There is also more leverage available at better terms for buyers of large companies.
Earlier quoted context omitted.
Recurring revenue or profit?
In the few conversations I've had, it's always been revenue. This provides an incentive to spend lots of money on user acquisition, even if doing so means losing money (or not making as much). I wish there were a standard assumption that if a business is profitable, then we use profit instead of revenue, and (crucially) use a much larger multiplier. It feels like I'm always having to remind folks that revenue ≠ profi…
Earlier quoted context omitted.
Recurring revenue or profit?
It's almost always revenue, but I'm not sure why. I'd pay more for a business doing $500k in revenue with $250k profit (50% margins) than a business doing $1M in revenue with $100k in profit (10% margins).
Earlier quoted context omitted.
Recurring revenue or profit?
It's almost always revenue, but I'm not sure why. I'd pay more for a business doing $500k in revenue with $250k profit (50% margins) than a business doing $1M in revenue with $100k in profit (10% margins).
Double the 500k R / 250k P company without more expenses, and you now have 1 M R / 750k P. Double the 1M R / 100k P and you now have 2 M R / 1.1 M P.
Especially if a firm can come in and do a round of layoffs (Replace support with outsourced, fire marketing, replace devs with outsourced).. it would be pretty easy to get the margin really really high for a few years, which is all they may be looking for.
In the text the author discusses also selling the company outright - question: how does one calculate a price for this usually? A few years' profit?
It seemed like a non traditional route as it wasn't the usual X earnings multiplied by a time period.
Earlier quoted context omitted.
It's about establishing and limiting legal liability. Being able to establish a solo business as a company means that you don't lose your house and possessions if your company fails.
There is very little liability protection for a single-member company. You are usually going to be personally liable for your actions, and can get sued individually along with the company. Incorporation / LLC does not protect you from acts where you are also personally liable, and it does not shield your personal assets in that case either. Edit: in the US, that is.
Earlier quoted context omitted.
It's about establishing and limiting legal liability. Being able to establish a solo business as a company means that you don't lose your house and possessions if your company fails.
There is very little liability protection for a single-member company. You are usually going to be personally liable for your actions, and can get sued individually along with the company. Incorporation / LLC does not protect you from acts where you are also personally liable, and it does not shield your personal assets in that case either. Edit: in the US, that is.
> Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor—such as a supplier, a lender, or a landlord—the creditor cannot legally come after an LLC member's house, car, or other personal possessions.
https://www.nolo.com/legal-encyclopedia/llc-basics-30163.htm...
Obvious errors being breaking the law, paying for your business loans with personal funds, etc.
Earlier quoted context omitted.
Yes, service companies usually sell for 2-3.5x annual recurring revenue (ARR), which is measured by averaging your last 3-5 years of revenue. And you'll need to be easily replaceable.
Recurring revenue or profit?
For what it's worth, the company I work for currently just got sold off for $4.4bn USD by our parent company. Based on quarterly filings, that equated to about 2x annual revenue and 9-10x EBITDA for last year (not sure what the multiple was for net).
Earlier quoted context omitted.
It's almost always revenue, but I'm not sure why. I'd pay more for a business doing $500k in revenue with $250k profit (50% margins) than a business doing $1M in revenue with $100k in profit (10% margins).
It assumes a lot of costs are fixed, and do not scale with income. Software is weird like that. Double the 500k R / 250k P company without more expenses, and you now have 1 M R / 750k P. Double the 1M R / 100k P and you now have 2 M R / 1.1 M P. Especially if a firm can come in and do a round of layoffs (Replace support with outsourced, fire marketing, replace devs with outsourced).. it would be pretty easy to get th…