Questions

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?

You have two main sections to consider on this valuation:-
First Section: your company value:-
Here you need to value your company as per the free cash flow basic. This will be your start point.
Also, your performance versus the competitor, and cash flow to equity invested. Also if the company has debt or no.

The lower you go for your WACC the better.

You need to also emphasis on growth opportunities by showing market acquisitions you had since you started the company till now, and the future opportunities for growth.

Another thing to consider, is the value of similar competitiors in the same market , with similar average size or scope of work. As these companies , already have an older history , so their cash flow can be used to predict your future cash flow more precisely.

Other items that can raise the value of your company is the number of PhDs you have in your company , if you have an R&D department / expenditure , if you filed a patent on something your company works on, like a special data mining algorithm or something. These will be valued with options valuation techniques.

Second Section: the value added to the acquirer after this acquisition. Your acquisition should add an extra value to the other company as well..
So 1 + 1 = 3 not 2.
You need to reflect how your acquisition will affect the operational efficiency in the other company ( if it does ) , or increasing its cash flow / sales . Also increasing the working capital for the other company , as lots of solid assets may not be needed, like relocating offices to their buildings. Also using the acquirer company departments, like financial department , HR department..etc., for both companies, will enlarge the scale of work , maximise expertise, and also decrease the running cost relatively. This added value in the acquisition should be counted as well in your company value.

Let me know if you have more questions.

Good Luck !


Answered 9 years ago

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