I looked at the FE International listings, and I have to ask of those who know about these things: What would lead somebody to sell a going-concern business for 2x earnings? There were several examples. I don't want to go straight to "scam!" but that seems too good to be true.
The exact setting for N comes down to a variety of factors, market conditions, and a negotiation between a particular buyer and a particular seller. As someone who happens to be long SaaS companies at the moment I would prefer N=50 but I know SaaS owners whose lives would be improved by a sale at 2. (As mentioned in sibling comments, market right now is 3ish.)
Why?
Wow!
What was the name of that business and what year was that?
But it's very well possible to make deals like these, it just matters that the buyer has a different idea of the value of the business for them than you do. Which answers your earlier question in a way, but the 'why' is actually probably a lot more complicated than that and I can't really speak for the buyers, the only thing I know for sure is that they had a totally different idea of where they were taking this than I did. They probably thought it was cheap.
Beauty is in the eye of the beholder...
12 months revenue ending 2013-12-31: $664.89M
Twitter IPO Valuation: $24 Billion (Nov. 07, 2013)
Price/Gross revenue ratio = $24B / $664.89M ~= 43x
That makes your 20x sale look like an underperformer.
Often businesses (especially those selling nearer 2x) are relatively young so the valuation reflects the risk.
We have a very stringent pre-listing due diligence process so while it remains the buyer's responsibility to conduct their own due diligence, none of our listings are scams.
I wrote a little more about why people sell businesses last year: https://www.linkedin.com/pulse/20141023121347-71653461-6-rea...
Note: reading that back almost sounds like an advert but I'm not affiliated in any way, just a happy customer :)
Re: valuation - reputable online businesses are typically valued in the 2-3.5x annual net profit range. See http://feinternational.com/blog/how-do-you-value-an-online-b... for more info about valuations.
But honestly, it comes do to what the market is willing to pay for a financial (as opposed to strategic) acquisition.
Also, if you then reinvest that $3m in more traditional assets (stocks/bonds/property/alternatives), you can earn 5-10% on that capital ($150-300k per year), WHILE working on something new. Capital is awesome.
Under certain conditions you can use "Entrepreneurs' Relief" to only pay 10% capital gains on your sale of a business (up to a limit of £10m), so a £3m sale could net you £2.7m in hand.
Depending on many circumstances, £1m in dividends (per year) should net you around £750k. So it would take about 3.6 years to make the same as selling for current 3x annual profit. However, if your profits were increasing by more than 10% per year, it would be a wash.
£1m in corporate income is taxed at 20%, so you're left with £800k after tax. Then you declare a dividend, and pay a dividend tax. That'll be 25-30%, so you'd be left with £800k - 30% = £560k in pocket.
To earn £3m (in pocket), you would have to generate approx. £5.25m in pretax corporate profit.
Whereas with a share sale, you will be taxed at 10%, meaning you're left with £2.7m (if you sell for £3m). A significant difference.
I live in Belgium, where the difference is even larger. Capital gains on share sales are tax free, corporate income + dividends are taxed at about 45%.