Mirus Capital AdvisorsMirus Capital Advisors

Advice for Entrepreneurs, Business Valuation, Mergers and Acquisitions, Pre-sale Planning, Manufacturing Automation, Selling a Business, Strategic Advisory, Industrial Manufacturing, Technology, Software

Achieving an Exceptional Multiple in the Sale of Your Company – Part 1

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In October of 2014, we blogged about valuing the intangibles of a business.  Here we wrote about achieving value beyond merely what the financials associated with your business would indicate.  (see http://merger.com/whats-company-worth/ ).  As follow on, we are often asked what it takes to leverage these KPI’s to achieve the exceptional multiples that one hears so much about.  The 10, 20, 30X revenue outcomes that just make you want to scream, “Why not me?  My company is great; I worked hard; My customer’s love our products; Why can’t I get that kind of valuation?  So what does it take to achieve exceptional multiples?

First of all let’s set a baseline.  Typical multiples for reasonably well run software companies run 2-3X revenue (4-5X is considered superior) for traditional licensed models and improve somewhat for in SaaS model to 5-7X.  Of course there are many things that impact these valuations, none the least of which are economic conditions and the specific industry you operate in. But by and large if you took a large enough sample these multiple would hold true to form.  Mean revenue multiples in the public sector of Manufacturing Automation range from 2.6 for System Integrators and 2.8 for PLM to 5.1 and 5.8 for ERP and SCM respectively, thus paying more for any acquisition therefore becomes dilutive.  Similar numbers are easily available for most industries.  So what is it that makes major corporations pay large, dilutive multiples?

Truth is, it is a combination of multiple elements and a few absolutely critical factors that must combine at the right time to create a “perfect storm” in the market for your company.  To try to simplify all of the variables Mirus has broken the factors down into 2 distinct areas that we call internal and external valuation drivers.

Valuation_Drivers_Graph1

Internal valuation drivers are those elements that you control.  They are fundamentally your inherent knowledge and capabilities, and how well you have applied your abilities to the market.  They relate, in general, to many of the intangibles we have spoken of before and include:

  • Market Size and Growth Characteristics
  • Strategic Relationships
  • Scalability
  • Intellectual Property
  • Customer Relationships
  • Domain Expertise
  • Exceptional and Predictable Growth

While the internal Valuation drivers are the foundation for generating a solid outcome, the external elements are the multipliers of a deal.  While the Internal elements are “required” and can move the needle on a deal toward the higher end of normal, it is these elements that really create exceptional results.  They include:

  • Timing
  • Scarcity
  • Industry Dynamics
  • Competitive Friction

By establishing a solid foundation of internal valuation drivers you position yourself to take advantage of external drivers.  By planning and being aware of the external drivers you can leverage these market dynamics to your advantage and achieve exceptional outcomes.  In subsequent blogs we will take a look at each area, and how to leverage these elements to improve your exit multiple, but for now if you would like more information on this topic feel free to download our white paper on Achieving an Exceptional Multiple in the Sale of Your Company.