Know your worth

Before sitting down at the negotiation table opposite the PE firms you wish to discuss a deal with, you need to evaluate your company’s worth. Such a valuation forms part of the foundation for establishing realistic negotiation targets. 

A valuation should include appraising your material and immaterial assets, your current situation and future potential. It should also include an analysis of deal values and deal structures in your industry. Generally, revenue or EBITDA multiples are used as a yardstick for the former. The multiple is currently high in the technology sphere. For example, average EBITDA multiples for Software-as-a-Service (SaaS) deals in the first half of 2018 was north of 10x.  While high valuations may cause some investors to pause, unsure if they will be able to make a profit, the current amount of available capital is working as a counterbalance, incentivising investors to seek new deals. 

Many factors can affect your valuation, both positively and negatively. Below is an inexhaustive list of areas that affect your company’s value: 

• Technology: Including your products, services, technology, intellectual property and R&D.
• Management: A proven track record of overcoming challenges will likely increase your valuation.
• Industry trends: Macro- and micro-trends that directly and indirectly affect your industry will be something that PE firms are acutely aware of during negotiations. 
• Revenue: Your current revenue, historical growth and projected future revenue. Important factors include whether your revenue is recurring, project-based and if it comes from a broad customer base or few, large customers.
• Turning revenue to cash flow: Your ability to turn revenue into positive cash flow. This is a key metric for PE firms, as it indicates that you are able to grow your liquid assets.  
• Growth potential: Your future potential for growing revenue and profitability; includes potential untapped markets or customer bases, as well as the diversity of your growth strategy.
• Sales: Includes customer stickiness, your historical sales growth and the organisation and performance of your sales team.
• Potential future buyers: Who might be interested in acquiring you in the future, or your potential to IPO within a set timeframe.

The valuation of each part is not based solely on a picture of current and past performance but will include an analysis of what your material and immaterial assets (especially IP) will be worth over time. 

In many cases, it is beneficial to carry out your own due diligence process ahead of negotiations. The process will help form a clear idea of what your company is worth, as well as what opportunities and challenges an interested PE firm likely sees for the future of your company – and therefore will focus on during deal negotiations.