Selling a start-up

[Alphathree33]

How do you generally approach finding the value of a start-up?

In this case, the start-up is basically just a holding entity for the ownership rights to a prototype piece of software.

The prototype works well, it competes with software that's still in-development at some major companies (I realize this is vague), and we've had interest in it from a number of companies.

Basically, we want to sell the full IP rights to someone else for them to continue development with it.

(To realize the value of the asset, as they say.)

I have a feeling we'll bet getting into price negotiations sooner rather than later.

Now, I've never done something like this before. I have no idea how to determine a fair price.

For example, pick a number like $1 million. On the one hand that seems quite high for a piece of software that's a prototype with no customers or revenue. On the other hand, there is a lot of strategic value in acquiring this software right now, lest it end up in the hands of a competitor. This particular market is just emerging.

I realize this is all very vague.

Does anyone have any comments despite the vagueness?

 

[AgaBoogaBoo]

Most businesses under $500k or so will sell for less than they may be worth on paper. It goes back to the same thought that a business is only worth what someone is willing to pay for it.

You need to grab a standard NDA with someone that knows what they're doing and can assign a value for this so that you have numbers to work with, AT isn't the place to ask, but maybe someone can chime in with information on how to generalize the value.

 

[Alphathree33]

Originally posted by: AgaBoogaBoo
Most businesses under $500k or so will sell for less than they may be worth on paper. It goes back to the same thought that a business is only worth what someone is willing to pay for it.

You need to grab a standard NDA with someone that knows what they're doing and can assign a value for this so that you have numbers to work with, AT isn't the place to ask, but maybe someone can chime in with information on how to generalize the value.

We'll do that when we're at that stage. I just wanted some preliminary means of thinking about it until then.

 

[OS]

does the company make any profit at all?

 

[Alphathree33]

Originally posted by: OS
does the company make any profit at all?

No - it's just the prototype. There is a demonstrable but untapped market for software in this category, though.

 

[Dr. Detroit]

I would suggest you have a valuation firm look at this Company. They will need to assess the future cash flow of the product.

If there is no history of sales it will be difficult ot get a true valuation and will therefore most likely sell for less if it was an established product with a history of sales.

 

[AgaBoogaBoo]

Originally posted by: Alphathree33

Originally posted by: OS
does the company make any profit at all?

No - it's just the prototype. There is a demonstrable but untapped market for software in this category, though.

That's going to be a limitation, the first question you'll be asked is why it's being sold if this market is there. There have been tons of companies in the past that pumped millions into developing a product, but they never got the clients and so it was worthless and doomed essentially.

 

[Alphathree33]

Originally posted by: Fmr12B
I would suggest you have a valuation firm look at this Company. They will need to assess the future cash flow of the product.

If there is no history of sales it will be difficult ot get a true valuation and will therefore most likely sell for less if it was an established product with a history of sales.

Is this how the analysis is always done... just a projection of future cash flow? In this case, the product has particular features and particular algorithms that we can probably show prior art for in a patent scenario.

And we know other companies are interested in the same features. But we were there first.

Does that change much at all, or is it still just, "fine, great, but you're not making money."

 

[IceBergSLiM]

I would suggest finding a similar product that does exist and extrapolate your future sales figures from those. Obviously you want to be conservative in your valuation.

 

[D1gger]

Originally posted by: Alphathree33

Originally posted by: Fmr12B
I would suggest you have a valuation firm look at this Company. They will need to assess the future cash flow of the product.

If there is no history of sales it will be difficult ot get a true valuation and will therefore most likely sell for less if it was an established product with a history of sales.

Is this how the analysis is always done... just a projection of future cash flow? In this case, the product has particular features and particular algorithms that we can probably show prior art for in a patent scenario.

And we know other companies are interested in the same features. But we were there first.

Does that change much at all, or is it still just, "fine, great, but you're not making money."

Your patents will help reduce the risk in the analysis of the future cash flow, but the future cash flow projection is the only method I am familiar with using to evaluate a business without liquid or tangible assets.

 

[Uppsala9496]

How much did it cost to develop?

A lot of companies will look at what similar products are valued at in terms of revenue/cost/net income even if they are not the same. Then they will state their product should be worth $XXX more or less in the future depending on a variety of variables (projected sales, upgrades, competition, etc).

I analyze a lot of start-up company's for work and their projections are 99% crap. The best you can do is look at the cost of development and then what it will be competing against. Then you can value it. Projections for the next 24-54 months are nothing but a guess, and don't use them as the true value of the product.

 

[Ameesh]

I can tell you a little on what goes on on the other side of the table. When we look at samller companies to acquire we do the following things:

1) How long would it take to build it ourselves?
2) How long did it take for them to build it?
3) What kind of penetration or customer base do they have? (not applicable to you)
4) How much would it cost to integrate with our own systems?

Using these data points you can come up with some rough figures and then you can apply some multiplicatve factor

e.g. the software would take 10 man years to build which is about $2 million , it will take 6 man months to integrate (2 calander months which is negliagble) and would yield a time to market advantage of 9 months which is worth $3 million and we have to deal with multiple bidders or a hot market so we tack on a multiplier 2x

that means that the final estimation would run something like $2MM + $3MM x 2X = $10MM

now granted this is a fictious back of the envelope estimation but I have seen many evaluations done like this. If there are stellar engineers on the team the multiplier may go up.