Negotiating the value of your own business is tough. For company founders, a startup is worth far more than just revenue and profits. It’s the result of endless late nights and hard work. If you’re starting to get interest in your startup from potential acquirers and investors, congratulations. It’s clear that your hard work and sacrifices have been worth it, and investors are willing to pay a potentially life-changing sum of money to you.
But don’t start celebrating just yet. The jump from getting interest in your business to completing the deal is big. Mergers and acquisition deals usually take four to six months to complete, and that’s if everything goes swimmingly. You’ve got a lot to do in the meantime, and one of the most significant parts of the process is negotiating the value of your startup.
If you’re about to start valuation negotiations with potential buyers or investors, Foundy is here to help. While our digital marketplace for startups makes the acquisition process far quicker and more straightforward, we want to do everything to help. That’s why we’ve put together this guide to startup valuation negotiations and the things you can do to ensure you make the most from your deal.
Understanding startup valuation methods
Before jumping into negotiation tactics and strategies, it’s essential to understand valuation methods. Whether you’re dealing with a venture capital firm, angel investors or another business, how they assess the value of your business will be different from how you do. As a startup founder, your valuation will naturally be guided by your experience of the business and your vision for its future. But investors will take a more objective view of your business as it currently is.
As investors and acquirers will value your startup differently, it’s vital to understand their valuation methods before entering negotiations. There are several startup valuation methods to be aware of before you go into value negotiations for your startup company:
Risk factor summation method
The Risk Factor Summation Approach assesses any risks that can affect an investor’s return on investment (ROI). Through this method, an estimated initial value for the startup is calculated, and risks add to or reduce that value. Some of the risks taken into consideration include:
- Management risk
- Manufacturing risk
- Market competition risk
- Technological risk.
Entry cost / Cost-to-duplicate approach
The Cost-to-Duplicate Approach is a valuation method that considers the costs of a startup and product development to assess how much it would cost to recreate the business. As the name suggests, it’s a way for potential buyers to see how much it would cost to duplicate the company by taking into account:
- Running projection statement
- Future sales and growth
- Brand value
- Customer base.
The Berkus Approach or method was put together by an American investor and venture capitalist called Dave Berkus. It bases the value of a startup company on five success factors:
- Basic value
- Strategic relationships
- Production and sales.
By evaluating how much value each of these factors has, investors can put together the total value of a startup. This approach is also sometimes called the Stage Development Method/Approach.
Future valuation method
Investors use the Future Valuation Method not to assess the current value of a business but to see its future potential. Acquirers use this to calculate their return on investment over a set period. This calculation is based on projections, including:
- Growth projections
- Cost and expenditure projections
- Sales projections.
As you can see, there are plenty of methods for valuing startups. Venture capital firms will use different valuation methods depending on several factors, including:
- Your company’s future potential
- Revenue growth
- Physical assets
- Brand value
- Cash flow.
Founders need to ensure they have an accurate and reasonable valuation and understand valuation methods before entering negotiations. Going into negotiations without a good grip on popular startup valuation methods means more experienced venture capitalists can easily blindside you.
But just understanding valuation methods isn’t enough to ensure you get the best deal possible. We’ve put together the three best ways to negotiate a higher exit price for your startup.
5 ways to boost your startup valuation during negotiations
1. ) Ask for it
It might sound obvious, but an often overlooked but obvious part of the valuation process is to ask for the price you want. Although you should avoid overestimating your valuation, you should remember that this price is just a guide and may not always accurately reflect the best price you can achieve.
Decide on a high price, acceptable price and a cut-off, walk-away point. This will give you room to manoeuvre, whilst still offering the buyer options so no-one feels backed into a corner.
2.) Build a friendly relationship with potential buyers
In most acquisition events, the buyer sees value in the company’s reputation, customer base, team and other assets. Therefore, a good working relationship between the buyer and the founder is key. Even if the founder does not stay in a full-time role after the acquisition, they may still need to be involved in advising and supporting growth.
Showing the buyer that you are cooperative and willing to support the new owner may lead to a marginal increase in the valuation. In reality, this could convert into tens or even hundreds of thousands of pounds extra in additional payouts for shareholders.
3.) Emphasise recent developments
A lot can happen in the negotiating period of your acquisition. If you have added material value; a new partnership, deal, or product launch, for example, then this is something you can use in your favour to negotiate a higher price. Anything that improves your revenue will affect the bottom line when it comes to negotiating your company’s acquisition. This is one of the reasons why it’s so important to stick to your organisation’s roadmap right up until the deal is signed.
4.) Make efforts to de-risk the acquisition
During the acquisition process, your buyer will be trying to minimise risk as much as possible. They’ll be trying to ascertain if they’ve spotted a genuine opportunity, if they’ll be able to scale the business post-acquisition, and whether their assessments this far are accurate.
You can help to alleviate some of their concerns by sharing as much as you can pertinent to the acquisition – metrics, deals, technology, and so on.
5.) Be prepared to walk away
Any experienced salesperson will tell you that the key to successful negotiations is knowing when to walk away. When you’re selling a product or service, there will always be someone who tries to lowball you or offer unfair terms, and business sale negotiations are no different.
If you’re not prepared to walk away from these types of offers, you’re likely to lose money on the deal. However, if you’re willing to walk away from a bad deal, you’ll be in a much better position to negotiate from a position of strength. By being ready to walk away from a sale, you signal to the other party that you’re not desperate and are willing to stand firm on your price. This can often be enough to get them to improve their offer, and it can help you get the best possible deal.
Make valuation negotiations easy with Foundy
Selling a business is no mean feat, and if you’re planning on starting the process, you should be prepared for a lot of hard work. Getting everything in order to make your business appealing takes time, and it can be a lengthy process to find investors and acquirers.
With Foundy, you can make the entire M&A process far easier and faster. Our digital marketplace for startup companies has been put together by a team that understands the pitfalls of the M&A industry and aims to solve them.
By creating a free seller account with Foundy, you’ll be able to:
- Create a free and anonymous business listing
- Receive offers from potential buyers
- Negotiate with buyers directly through our platform
- Sell your business in as little as a month.
Join Foundy as a seller today to start receiving offers and negotiating the best deal. Foundy gives entrepreneurs the freedom to fly. Prepare for takeoff.