

YC Help: I need Acquisition Advice - nextmoveone

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?<p>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>P.S. - Market Size: Every Internationally Traveling U.S. Citizen.<p>P.P.S. - I would not stay after the technology integration and neither would half of the employees.
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webwright
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."

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nextmoveone
I'm 21! Retirement!?

Points taken. Very much appreciated.

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

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daniel-cussen
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.

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nextmoveone
Thanks for that one!

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asdf333
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.

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dfranke
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.

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jorgeortiz85
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.

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mrtron
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.

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Flemlord
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?

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dkokelley
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!

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xirium
> 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.

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jdavid
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.

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brk
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.

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rms
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?

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nextmoveone
I say growth will peak in 6-9 months.

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Flemlord
Peak, or level off?

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nextmoveone
Peak, and level off.

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omnipath
Why level off? Is it because of resources (lack of) that'll limit growth, or
something about the market you're in? That may have a factor in the price you
could ask for.

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nextmoveone
No, simply because it's seasonal.

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wisernow
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 ...

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bijan
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.

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aneesh
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.

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goodgoblin
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!

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srp
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.

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

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

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

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

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

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

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kingnothing
Agreed. You should look in to Hushmail, or even something as plebian as Gmail.

