No way that 7, 15x is realistic. From my previous 2 startups none were sold for more than 4x. And these were healthy growing +10m businesses. I am not sure where you got those numbers from. I am curious.
Thanks for posting this. I was also misinformed, thinking 7/15x was reasonable, but for small businesses valued primarily on cashflow, looks like 3x is more accurate (of course, growth affects that number a lot).
It really depends on a bunch of factors, if you've capped out your total addressable market, and/or there's no fat to cut out of the business (i.e. potential is limited) lots of competitors etc, then a low valuation is reasonable.
But if you're growing, have big upside, and can be a rollup or been operating quite inefficiently 4x would be ridiculously low.
> But if you're growing, have big upside, and can be a rollup or been operating quite inefficiently 4x would be ridiculously low.
That's the dream, but the number of startups that check all the boxes to fall into this category is extremely small.
There's a lot of data supporting 2-4X for small SaaS companies. You'd have to be growing at an extreme rate year over year over year for 4X to be considered "ridiculously low".
Why sell a healthy growing $10m business for 4x earnings? Did you have debt to service, or just wanted to do something different, or some other reason?
At 4x it almost seems worth it to hire out the rest of your day-to-day and let the operation cruise. The company will probably under perform over time but you'll get more juice from the fruit.
> At 4x it almost seems worth it to hire out the rest of your day-to-day and let the operation cruise.
As many small business owners learn the hard way, it's nearly impossible to find someone capable of single-handedly operating a small startup who would rather operate your startup than their own startup.
Frequently, you can find someone to take the role for a while. They might even perform well while you're training them up. Then they're likely to go off and start their own thing, which might come uncomfortably close to competing with you (while staying just outside the reach of noncompete agreements).
With how fast tech is pacing there's no guarantee that this business wouldn't be outpaced by competitors, and so if you stay idly by and provide no innovation, the business might just fizzle out.
Because valuation is different than the actual yearly revenue. Company could be valued 10m, but revenue 1m. In our case because of legal permits we aquired to run our business and would normally take up to two years to get.
Was management in place so when the founders exited the company would still grow? With lower valuations (1-3x), the purchaser is often buying a job in some way (either for themselves or needing to find an operator). At 7-10x multiple, the company is already has senior management in place so the new owners would expect continued growth without their own intervention.
The last startup I was at that sold 'only' made the owners millionaires, when they were hoping to retire.
If you're in your thirties or forties, a million bucks won't even get you a school teacher's lifestyle for the rest of your life. A million bucks makes the rest of your work life low-stress, but not non-existent. You still have to work, you just don't have to worry about paying rent, or getting exploited by your boss. You can always quit, and you can always say no (one of the reasons some bosses like a hint of desperation on their employees)
They bought water view condos, one got his teeth fixed, and then they had to go right back to work.
A million after taxes is worth 20 years at 100k after taxes (50% rate).
Investing a million today say in real estate over 20 years will give you money to live on while you rent and a the property can be sold for double in 20 years. Repeat and this strategy would bring increasing wealth for a 20 year old.
The exceptions are for companies with extreme growth rates for multiples years in a row. These are extremely rare, even more so with pure bootstrapping.
I can't speak for valuations, but I don't see the 'no logical buyers' argument. This product has multiple competitor products, mostly at far higher price points, any of those manufacturers would seem like a logical buyer to me (if only to get rid of the competition). Can you elaborate?
You aren't just buying a company, you're buying a job. In this blog post, the payroll expense is $250k a year. The founder is working for free 40 hours a week, acting as a software dev, managing a $40k advertising budget, developing the product, and overseeing the customer support team.
If you buy this company and hire somebody who can do all those things, that $235k of net profit becomes $0.
Buying it just to shut it down without continuing the product- eh- does your product really address all the needs of the customer base? Or will they go to another competitor instead?
It's small. There are very few logical buyers of technically complex small businesses. There are logical buyers of small businesses and logical buyers of technically complex businesses, but at the intersection there is not.
Even bog standard SAAS companies struggle to sell at a decent multiple when they are really small, and they aren't especially complex.
I think this is one of those areas where a competitor buying you can make sense. Either your product is attractive to higher margin customers, at which point they are buying into a higher end market, or your product is part of the low-end, and by buying you out and shutting you down, they hope to convert some of your lower margin customers to higher margin customers, and let some of your high-maintenance customers go bother one of your mutual competitors (which is honestly the most Sun Tzu-ish, borderline Machiavellian, reason to fire a customer)
