

Ask HN: How much are we worth? - savoy11

We are a small startup with two founders and no employees. Bootstrapped, no external financing whatsoever. We are selling software and making approximately $200K per year in sales, but we are also growing rapidly, at about 5% each month. We have $0 marketing budget - meaning we just split the revenue. We do not have any expenses other than our hosting ($10 per month).<p>I know that many variables are missing here, but very roughly speaking, how much are we worth at this point? There is interest by our competitors and they want to buy us, however I have no idea how much to ask for.
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davidwparker
If you want a corporate finance answer...

Assuming you can go on forever, you are a perpetuity with annual growth g =
79.58% = ~80% (1.05^12 - 1), coupon c = $200,000, and some value of discount
rate r, which you could otherwise get with your money. For our example, we'll
suppose you can invest somewhere and get a 10% return.

The formula for a growing perpetuity = PV = c/(r - g), where PV is the present
value. This formula only works if the growth rate is less than the discount
rate... following this rule, we have to use a higher discount rate, so we'll
assume you can get 100% somewhere else (let me know if you have a place where
you can do this.)

If you take the series of system payments, then you would have:

PV = c/(1 + r) + c(1 + g)/((1 + r)^2) + ... + c((1 + g)^n)/((1 + r)^n) which
ultimately equals PV = c/(r - g)

PV = 200,000 / (1.00 - .80) = $1,000,000

So $1,000,000 is the amount someone would be willing to pay for all the
present values of all future earnings on the perpetuity, assuming you have an
r = 100%.

If g > r, then the growing perpetuity would (theoretically) have an infinite
value.

edit: added value = $1,000,000 assuming r = 100%

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staunch
With your revenue anything less than $1M is probably too low. The upper limit
is almost boundless. If the buyer would have to spend a year, $1M in ads, and
15 employees to get to where you are then it might be worth $5M or more to
them. Avoid pricing it based on revenue alone.

Think about how you're going to feel after you've sold. At what price will you
not regret it? At what price will you be really happy?

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toast76
5% growth monthly (if you can manage to continue that growth) means you're
just about doubling the value of your company annually. ($16k sales this month
will be $32k in 15mths).

If you keep the company growing at this rate for another 3 years you'll have
an annual income of over a $1M.

So how many years are you planning to run the business for? What is the likely
sustainable growth?

Do some maths on that.

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curt
Take EBITDA (Earning before income tax, depreciation, and amortization) and
multiply that number by between 5-18. You get a higher multiple through higher
growth, long term consumers, sustainability (your consumers won't leave),
competition, size, etc.

For what you said you likely are around 10, so if the company doesn't need
someone to sustain growth it would be worth around 2M. If it's a talent
acquisition or IP does change the calculation somewhat. Now a year from now I
would raise that multiple to around 12-14 if you maintain your growth rate.

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jumby
ya right 12-14. maybe in 1999.

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curt
At 5% per month, after the first year the EBITDA multiple would go from 12 to
8. After 2nd year, 5 and so on. So the company would pay off the purchase
during the 4th year. A good deal for any purchase.

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zbruhnke
generally speaking you are worth 5 times your annual revenue ($1M) however
with the growth rates you are experiencing I think you would not be out of
line asking for $1.5-2M maybe even more if ou can prove the growth trend over
sevral months with hard numbers

~~~
petervandijck
3 to 5 times annual revenue is indeed typical. From there on it's all
handwaving about "exponential growth" and "strategic value" to get more than
that.

You are "worth" what they are willing to pay, it's that simple. In terms of
money, you're worth about a million dollars. But it wouldn't be that weird to
get much more, depending on how good you are at handwaving about "strategic
value" and "exponential growth", and playing the negotiation game.

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MaysonL
How much time are you 2 putting into the business? How much employee time
would a buyer have to put into the business?

If a buyer has to pay a fulltime developer to replace you guys, then your
business wouldn't make them very much, unless it keeps growing for a few years
without cost increases.

~~~
savoy11
Almost full-time. Product is also very support intensive (a lot of email/forum
support that is highly technical).

The product can fit well into competitors portfolio of products and can make
them much more than what we do (they are established, big, have sales
channels, etc)

~~~
jaden
If they want you guys to join the company for some period of time, make sure
to account for that in the price.

For example, if you commit to stay on some number of years and an exciting
opportunity presents itself during that time, you want the compensation to be
enough that you can pass on the opportunity without too much heartache.

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coryl
You'd have to factor in the industry you're in as well. Some markets are
volatile, and don't last long.

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noonespecial
The general rule for brick and mortars is:

Assets - liabilities + 5 X last years profit.

This is a starting point. Then you add in all of the confounding factors. Web
businesses are nothing but confounding factors! If I were you, I'd take a hard
conservative look at my 5 year growth potential based on the growth thats
already happened and use that as an average for your 5 X profit.

If your buyers are serious this will open negotiations, if they were just
pulling the handle, hoping for a jackpot, they'll leave in a huff, trying to
make you feel as though you'd demanded an unreasonable sum.

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LabSlice
I believe that established businesses sell for 3-5 times their annual revenue.
Your situation sounds different. With practically no costs, steady growth, and
the claim that you don't advertise --- well, that can make you quite a premium
company to acquire. And the fact that you are being courted allows you to try
pitch for even higher $$$.

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jaden
I run a site that pulls in a decent amount from Google Ads. I was contacted by
a potential buyer and after going back and forth quite a bit, we arrived at
around 5x annual revenue. I realize Google Ads != selling software but at
least it's a data point.

~~~
savoy11
btw - somewhat related - how much money can be made of Google Ads out of a
site with 1 million page views per month? Content is technical - developer
oriented. We are currently running a niche ad network and making approximately
$1000 per month off ads, but I believe this is low.

~~~
jaden
From what I've heard (my site isn't technical so I can't say definitively)
technical sites have low click through rates because many developers use
adblockers and may not be as attracted to advertising. But it's hard to
estimate because it can vary wildly depending on how many folks are
advertising in your space. Run a month trial and see how it does.

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jumby
6.5 multiple seems reasonable for SaaS. 5 is a bit low for software with 0
expenses and no one is going to do >8 in these uncertain times.

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brudgers
How big is the market segment you serve in terms of total dollars?

What percentage of it are you currently servicing?

~~~
savoy11
Very competitive, established and growing segment. Also, kind of big.
Developer tools, basically. There are are at least 5 very big companies
(revenues of $10mil+) and hundreds of employees each, and like 100 small
companies in this segment.

It's a very hard and competitive field.

~~~
brudgers
The big question is, "do you want to sell right now or hold out for FU money
or have a lifestyle business?"

Unless the answer is "We want to sell right now" then this exercise is a
distraction...and a potential source of stress if you have 50:50 equity split.

If you want to sell now, then what is your ideal outcome when the value to the
purchaser: is your IP? your staff? elimination of competition? And more
importantly, what is your partner's ideal outcome in each of these scenarios?

Keep in mind that if your suitor's goal is to eliminate competition, just
floating the idea of purchase can create enough chaos to cause a divorce. My
best advice is to discuss what your company is worth to each of you first.

As far as value goes, you're producing revenue of $100,000 per full-time
employee. That doesn't leave much cash for a new owner so a valuation based on
current revenue would not be favorable to you. From a revenue standpoint,
you're basically a small business.

If the compeitor sees the potential value is in the IP, the real question
becomes, how much would it cost them to deliver competing functionality? That
number may be a lot less than you would want to sell for.

If the motivation is to bring you and/or your partner onboard, then you're
back to do you really want to sell + do you really want to go work for those
people? So the price is relative to the value you place on the company.

Sorry there's no numbers. My best advice is to determine quickly if both of
you even want to sell and get back to building your business until there's
actually an offer to consider. Good luck.

~~~
savoy11
Yes, thanks, I'll upvote that since it is spot on. You pretty much nailed all
the issues we have.

At this point we have chosen to just keep on. If we manage to sustain this
type of progress for the next 2-3 years, things cannot go worse. All that
potential buying thing puts an extra layer of problems, heavy discussions,
waste of time, lawyers, etc.

As far as out assets go - we might be very valuable since we bring a very
successful open source project (site has 1.2M page view per month) +
commercial products built on top of it. Just the name and open source site
pointing to our competitors may bring them a lot of value alone.

Our usage base (for the open source products) is also huge. The goodwill and
IP are I believe quite expensive at this point.

But we will just move on and keep going. Thanks a lot.

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crasshopper
Just do the PV. $200*12 = 2400 k

If you can convince them the growth will accelerate, so much the better.

