I Merged My One-Person Software Company with a Bigger Player (2018) • Hacker News Board

Re: I Merged My One-Person Software Company with a Bigger Player (2018)

#31

Post by alexpetralia » Mon, Apr 29, 2019, 9:22 PM UTC

einarvollset wrote: post #22

kreetx wrote: post #7

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?

Depends on kind of business, profit level and size. 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, taxe…

Wow this is a fantastic explanation of multiples expansion. Exactly answered the question I had while I was reading. Thanks

Re: I Merged My One-Person Software Company with a Bigger Player (2018)

#32

Post by charlesdm » Tue, Apr 30, 2019, 6:51 AM UTC

einarvollset wrote: post #24

everdev wrote: post #21

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).

Usually it's dependent on the person selling (or their advisor). If a company is very profitable (e.g 50% margins) then an earnings multiple makes sense and the advisor will essentially present the company in such a way that it's pretty clear to the potential buyer that they're expected to think of valuation in terms of profit multiple. Incidentally, lots more buyers out there are comfortable doing that then revenue…

No sensible buyer (i.e. not strategic) is going to pay high revenue multiples for a private illiquid company. Exceptions to this might be when they have some advantage (existing customers etc) to sell to. But nearly all PE shops overpay on large deals.

Re: I Merged My One-Person Software Company with a Bigger Player (2018)

#33

Post by einarvollset » Wed, May 01, 2019, 11:58 PM UTC

charlesdm wrote: post #32

einarvollset wrote: post #24

Earlier quoted context omitted.

Usually it's dependent on the person selling (or their advisor). If a company is very profitable (e.g 50% margins) then an earnings multiple makes sense and the advisor will essentially present the company in such a way that it's pretty clear to the potential buyer that they're expected to think of valuation in terms of profit multiple. Incidentally, lots more buyers out there are comfortable doing that then revenue…

No sensible buyer (i.e. not strategic) is going to pay high revenue multiples for a private illiquid company. Exceptions to this might be when they have some advantage (existing customers etc) to sell to. But nearly all PE shops overpay on large deals.

By strategic, I don’t mean “sensible” or “smart”, I mean it’s a buyer where the asset is considered strategic, hence it would always fit under your “when they have some advantage” umbrella.