Valuating new and fast growing tech company.

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February 03, 2021

by a searcher from Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM) in Monterrey, N.L., México

We are currently valuating a relatively new (4 years) and fast growing fintech company.

Client suggest a valuation based on forecast with big part of thew acquisition as an earnout based on forecasted growth.

Any recomendation on multiples or a different approach?

Thanks.

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Reply by a searcher
from Harvard University in Boulder, CO, USA
Fast-growing technology (>75% gross margin) businesses are usually traded on a revenue multiple. Slower-growing businesses are when you'd look at EBIDTA (won't talk about slow-growing ones here, if your prospect doesn't meet the below criteria lmk and I can add info on EBIDTA multiples). Caveat: these #s may be different for non-recurring revenue / non-SaaS tech businesses.

What counts as "fast-growing" depends on scale - <1M revenue, 200%+; <5M revenue, 100%+; <10M, 75%+; 10M+, 50%.

For a fast growing business you'd see revenue multiples like 3-5X if you're 1-10M in revenue. More like 2.5-3X at the low end, higher at the higher end?

If you're above 10M and fast-growing, revenue multiples like 4-7X are market. Above 7X is definitely possible, but it's more speculative / venture valuation, rather than a PE multiple. Strategic acquisitions will drive all of these multiple numbers up ++1-10 (totally depends).

Earnout thoughts: Everyone fights above whether these "standard multiples" are multiples on GAAP revenue, point in time ARR, or "forward revenues." Typically a standard PE firm will think of things in terms of GAAP revenue, but a business owner of course wants to do point in time ARR revenue (or even better, forward revenue) because it dramatically increases their opportunity. Handling that tension with an earnout is common for these kinds of smaller entities.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
You have great market input from Kendal and Einar.
I am an M&A Intermediary and also have valuation software firm. Few years ago, my client (a PublicCo) bought a start-up that just had one moth of non-recurring revenue. Price of $180 M cash. Even though everyone talks about a multiple, which is true, the reality also is that the buyer HAS to do ROI analysis. No ifs and buts here. I made interactive valuation presentations to the board and the executive management using my software. The presentation addressed assumptions and what-if analysis. The software is DCF on steroids or some have said ...it defies gravity. My main point is that you have to combine the market input with ROI and what-if analysis.
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