We are a data and mobile app start-up based in the UK. We were in touch with a large brand initially about partnership but now they have said they would like to acquire us. However they want us to come up with business valuation. Our business is only a year old with small amount of traction, but strategically important to their business. They are the only bidders right now. How should we approach the negotiation and/or the initial valuation?
As you may know, we acquired Clarity recently and have done numerous acquisitions at Startups.co so we spend a lot of time thinking about this. I've also personally been acquired a few times so I've been on both sides.
With that said I think the earlier comment about how much value you can bring to the acquirer is always a great place to start.
For example, if your company had $100k in sales per year, no reasonable multiple of that is going to get you into a meaningful acquisition price. So scratch that.
Instead - try to determine what kind of revenue the acquirer might generate in the first and second year post acquisition. That at least gives you a starting point.
What you can't do is start thinking about what Instagram sold for. None of that type of silly math matters. Those are one of conditions where a company is in such hot demand is so singular in it's value (no one else was that big at that time in that particular segment) that they play by entirely different rules.
What's nice about the 'what value can we bring' discussion is that it shows that you are thinking about what's in it for them, not just what's in it for you.