[tomasien]

revenue * multiple

let's say $10m in ARR * a 23x multiple

The way you get to the multiple is a combination of how fast the revenue is growing, how long you think that will keep up, and the margin of the revenue.

Craftsman Tools, for example, was probably not growing much or shrinking and likely had low margin revenue but I don't know.

[bufferoverflow]

Revenue is almost meaningless. At least use a multiple of profits or of net income.

You know, you can have a crazy revenue, and still lose money, and your company can be bankrupt in a few months.

[fjp]

Those issues end up being reflected in the multiple.

Revenue * multiple is just a common way of talking about it, especially because companies within the same industry tend to have similar multiples. In reverse if you notice two public (since the information is easy to find)companies with seemingly-similar businesses that have very different multiple, you can start looking into why, and the quarterly financial reports with high-level numbers like cash burn, outstanding debt, profits, or net income would be a great place to start :)

[mbesto]

> Revenue * multiple is just a common way of talking about it, especially because companies within the same industry tend to have similar multiples.

This is the common way media talks about it, either because they are (1) uniformed or (2) they only hear of top line revenue.

Companies are typically acquired for EBITDA * Multiple. However when their is a "strategic" acquisition (which this one is) then there is all sorts of weird math that potentially goes on.

Examples: (napkin math)

- Company being acquired has $100M in revenue, and $20M in EBITDA. Post close, they realize $20M in synergies, so they might buy the company at 20x * $40M Adjusted EBIDTA ($20M EBITDA + $20M new EBITDA from synergies)

- Company being acquired has $100M in revenue, and $20M in EBITDA. The acquirer is going to remove 100 engineers post close (100120k/yr = $12M) and therefore the new EBITDA is going to be $32M, and the company gets bought at 20x $32M EBITDA

At the end of the day, the ROI is really what matters.

It's also worth noting - most M&A does not realize the hypothesized deal value. So yes people are right to be critical, but without full details, being precise about what the true value of a company is nigh impossible.

[dpark]

All acquisitions are “strategic”. Even holding companies acquire assets that they believe accrue toward their strategic vision.

The EBITDA calculation is at best a sanity check for the acquirer.

[mbesto]

> All acquisitions are “strategic”.

I'm just using industry nomenclature. When people sell to a PEG, they don't say "we're selling to a strategic".

[tomasien]

correct

[tomasien]

I said the multiple is based on the margin of the revenue, aka, how profitable the revenue is.

Revenue is the proper starting point as it is the thing that can or can not be optimized and grown. Profitability of the revenue (now vs. future) is obviously a huge driver but it is not the right starting point.

[bogomipz]

In the formula you provided how is the number for the multiple arrived at? Is that the multiplier that will be realized at some future date based on the current rate of growth? If so what would that future date be - the next round of funding, an IPO, something else?

[tomasien]

It depends on the margin of the revenue and the growth rate primarily

[bogomipz]

So is there a generally accepted formula for calculating that given those two inputs?

[siruncledrew]

Would revenue or assets be used?

So once the accounting statements are reviewed, then most of the acquisition talk is just a discussion over a multiplier?

[Dwolb]

It all factors in but realistically with SaaS there is little in terms of fixed assets.

Most likely a lot of the additional factors for the valuation multiple calculation are going to be around efficient customer acquisition, sales cycle payback periods, and different income percentages (operating, net). X factor would be if other competitors of the acquirer are also bidding on the acquiree.

[bduerst]

Depends on the business. Something like Zipcar or similarly asset-heavy would incorporate assets in an MnA valuation, but SaaS would not unless they're flush with valuable patents.