Valuing Your Business Before Hiring a Software Investment Banker
There comes a time in the lifecycle of any software or technology entrepreneur that they will want to know the value that is housed in their business. They may need to know this for a number of reasons, not limited to the desire to know what the business could possibly sell for if a broad merger or acquisition offering was taken to the general market. In most instances, the company owner will want to get a detailed business valuation of his software company prior to fully hiring an investment bank. Performing the valuation first, gives you a bargaining chip in the negotiations with your investment banker. That is, it provides you with greater leverage when it comes time to negotiate the fees that will be paid for completing the transaction.
What a Business Valuation Entails
Valuations are based on a number of factors and no single company should be valued a single way. In fact, most professional business valuation experts will look at the company from several different methodologies and provide an upper and lower-bound range that a buyer (whether strategic or otherwise) would be willing to pay for the business.
Most business valuations include asset valuations, discounted cash flow valuations as well as valuation involving industry comparable multiples. With “comparables” or “comps” –as they are often called—a valuation expert will look at an entire industry and see what type of multiples of earnings are being paid for similar companies with similar valuation profiles. A similar valuation method is performed for commercial real estate deals. After multiple methods are used the valuator typically will create a proper range that business likely fits into.
How the Investment Banker Maximizes Value
When it does come time to sell, the business broker or investment banker is going to put a pretty bow on the business and make it look snazzy. In fact, they will do everything they can to paint the business in the best possible light before the business is ultimately sold to private equity groups, family offices or strategic buyers (i.e. buyers in the same sector). In addition, the investment banker will do all that he or she can to source all potential buyers for the business. This includes going out as broadly as possible when it comes time to sell. The more interested buyers the seller has at the table, the higher the eventual sale price the business will go for.
It also helps when negotiating the deal to showcase the business valuation, but also to show all the buyers that the seller is courting many other buyers. This decreases the power of the company buyers and gives the seller the highest possible exit price when the business finally sells.