Ask HN: How much are we worth? | Hacker News Reader

Ask HN: How much are we worth?

20 pointssavoy1127 comments

We are a small startup with two founders and no employees. Bootstrapped, no external financing whatsoever. We are selling software and making approximately $200K per year in sales, but we are also growing rapidly, at about 5% each month. We have $0 marketing budget - meaning we just split the revenue. We do not have any expenses other than our hosting ($10 per month).

I know that many variables are missing here, but very roughly speaking, how much are we worth at this point? There is interest by our competitors and they want to buy us, however I have no idea how much to ask for.

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If you want a corporate finance answer...

Assuming you can go on forever, you are a perpetuity with annual growth g = 79.58% = ~80% (1.05^12 - 1), coupon c = $200,000, and some value of discount rate r, which you could otherwise get with your money. For our example, we'll suppose you can invest somewhere and get a 10% return.

The formula for a growing perpetuity = PV = c/(r - g), where PV is the present value. This formula only works if the growth rate is less than the discount rate... following this rule, we have to use a higher discount rate, so we'll assume you can get 100% somewhere else (let me know if you have a place where you can do this.)

If you take the series of system payments, then you would have:

PV = c/(1 + r) + c(1 + g)/((1 + r)^2) + ... + c((1 + g)^n)/((1 + r)^n) which ultimately equals PV = c/(r - g)

PV = 200,000 / (1.00 - .80) = $1,000,000

So $1,000,000 is the amount someone would be willing to pay for all the present values of all future earnings on the perpetuity, assuming you have an r = 100%.

If g > r, then the growing perpetuity would (theoretically) have an infinite value.

edit: added value = $1,000,000 assuming r = 100%

With your revenue anything less than $1M is probably too low. The upper limit is almost boundless. If the buyer would have to spend a year, $1M in ads, and 15 employees to get to where you are then it might be worth $5M or more to them. Avoid pricing it based on revenue alone.

Think about how you're going to feel after you've sold. At what price will you not regret it? At what price will you be really happy?

5% growth monthly (if you can manage to continue that growth) means you're just about doubling the value of your company annually. ($16k sales this month will be $32k in 15mths).

If you keep the company growing at this rate for another 3 years you'll have an annual income of over a $1M.

So how many years are you planning to run the business for? What is the likely sustainable growth?

Do some maths on that.

Take EBITDA (Earning before income tax, depreciation, and amortization) and multiply that number by between 5-18. You get a higher multiple through higher growth, long term consumers, sustainability (your consumers won't leave), competition, size, etc.

For what you said you likely are around 10, so if the company doesn't need someone to sustain growth it would be worth around 2M. If it's a talent acquisition or IP does change the calculation somewhat. Now a year from now I would raise that multiple to around 12-14 if you maintain your growth rate.

ya right 12-14. maybe in 1999.

At 5% per month, after the first year the EBITDA multiple would go from 12 to 8. After 2nd year, 5 and so on. So the company would pay off the purchase during the 4th year. A good deal for any purchase.

generally speaking you are worth 5 times your annual revenue ($1M) however with the growth rates you are experiencing I think you would not be out of line asking for $1.5-2M maybe even more if ou can prove the growth trend over sevral months with hard numbers

3 to 5 times annual revenue is indeed typical. From there on it's all handwaving about "exponential growth" and "strategic value" to get more than that.

You are "worth" what they are willing to pay, it's that simple. In terms of money, you're worth about a million dollars. But it wouldn't be that weird to get much more, depending on how good you are at handwaving about "strategic value" and "exponential growth", and playing the negotiation game.

You'd have to factor in the industry you're in as well. Some markets are volatile, and don't last long.

How much time are you 2 putting into the business? How much employee time would a buyer have to put into the business?

If a buyer has to pay a fulltime developer to replace you guys, then your business wouldn't make them very much, unless it keeps growing for a few years without cost increases.

Almost full-time. Product is also very support intensive (a lot of email/forum support that is highly technical).

The product can fit well into competitors portfolio of products and can make them much more than what we do (they are established, big, have sales channels, etc)

If they want you guys to join the company for some period of time, make sure to account for that in the price.

For example, if you commit to stay on some number of years and an exciting opportunity presents itself during that time, you want the compensation to be enough that you can pass on the opportunity without too much heartache.

can make them much more than what we do

Sounds to me like it's time to trade up, get a smaller piece of the bigger pie. Ask for cash + equity swap. Get some ownership in the parent organization.

The general rule for brick and mortars is:

Assets - liabilities + 5 X last years profit.

This is a starting point. Then you add in all of the confounding factors. Web businesses are nothing but confounding factors! If I were you, I'd take a hard conservative look at my 5 year growth potential based on the growth thats already happened and use that as an average for your 5 X profit.

If your buyers are serious this will open negotiations, if they were just pulling the handle, hoping for a jackpot, they'll leave in a huff, trying to make you feel as though you'd demanded an unreasonable sum.

I believe that established businesses sell for 3-5 times their annual revenue. Your situation sounds different. With practically no costs, steady growth, and the claim that you don't advertise --- well, that can make you quite a premium company to acquire. And the fact that you are being courted allows you to try pitch for even higher $$$.

I run a site that pulls in a decent amount from Google Ads. I was contacted by a potential buyer and after going back and forth quite a bit, we arrived at around 5x annual revenue. I realize Google Ads != selling software but at least it's a data point.

btw - somewhat related - how much money can be made of Google Ads out of a site with 1 million page views per month? Content is technical - developer oriented. We are currently running a niche ad network and making approximately $1000 per month off ads, but I believe this is low.

From what I've heard (my site isn't technical so I can't say definitively) technical sites have low click through rates because many developers use adblockers and may not be as attracted to advertising. But it's hard to estimate because it can vary wildly depending on how many folks are advertising in your space. Run a month trial and see how it does.

Hey, you might want to consider putting some contact info in your profile. Some people are wary of discussing Adsense specifics in public forums.

Yes. It is very low. You can expect atleast 4 times higher than that.

it massively depends on your market. Insurance and debt keywords pay much more per click than the code related keywords I have on my blog. The only figure you should be interested in is your CTR. If it's above 5% then you're doing really well. Average is probably less than 1% CTR. Good is 2-3%. In my experience anyway.

6.5 multiple seems reasonable for SaaS. 5 is a bit low for software with 0 expenses and no one is going to do >8 in these uncertain times.

How big is the market segment you serve in terms of total dollars?

What percentage of it are you currently servicing?

Very competitive, established and growing segment. Also, kind of big. Developer tools, basically. There are are at least 5 very big companies (revenues of $10mil+) and hundreds of employees each, and like 100 small companies in this segment.

It's a very hard and competitive field.

The big question is, "do you want to sell right now or hold out for FU money or have a lifestyle business?"

Unless the answer is "We want to sell right now" then this exercise is a distraction...and a potential source of stress if you have 50:50 equity split.

If you want to sell now, then what is your ideal outcome when the value to the purchaser: is your IP? your staff? elimination of competition? And more importantly, what is your partner's ideal outcome in each of these scenarios?

Keep in mind that if your suitor's goal is to eliminate competition, just floating the idea of purchase can create enough chaos to cause a divorce. My best advice is to discuss what your company is worth to each of you first.

As far as value goes, you're producing revenue of $100,000 per full-time employee. That doesn't leave much cash for a new owner so a valuation based on current revenue would not be favorable to you. From a revenue standpoint, you're basically a small business.

If the compeitor sees the potential value is in the IP, the real question becomes, how much would it cost them to deliver competing functionality? That number may be a lot less than you would want to sell for.

If the motivation is to bring you and/or your partner onboard, then you're back to do you really want to sell + do you really want to go work for those people? So the price is relative to the value you place on the company.

Sorry there's no numbers. My best advice is to determine quickly if both of you even want to sell and get back to building your business until there's actually an offer to consider. Good luck.

Yes, thanks, I'll upvote that since it is spot on. You pretty much nailed all the issues we have.

At this point we have chosen to just keep on. If we manage to sustain this type of progress for the next 2-3 years, things cannot go worse. All that potential buying thing puts an extra layer of problems, heavy discussions, waste of time, lawyers, etc.

As far as out assets go - we might be very valuable since we bring a very successful open source project (site has 1.2M page view per month) + commercial products built on top of it. Just the name and open source site pointing to our competitors may bring them a lot of value alone.

Our usage base (for the open source products) is also huge. The goodwill and IP are I believe quite expensive at this point.

But we will just move on and keep going. Thanks a lot.

Just do the PV. $200*12 = 2400 k

If you can convince them the growth will accelerate, so much the better.

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