Valuation Round II - Intelligence vs. Data

The most important thing you should remember about valuation is that to be successful you must build a case around intelligence and not just data.  Commodity pricing is based upon data, but business value is subjective - what's worth something to me is worth something else to someone else.  Data is important, but it can't support a valuation alone.  Besides, I know how to make the data work in my favor.  Despite this, I have sat through countless meetings with potential targets whose owners say, "I'm worth $X because that's were some other companies in my industry trade," or "my company is worth $X because someone else paid a certain multiple for a similar company."  Better yet is when a seller says, "We feel really confident that we're worth at least $x," and that's it, no explanation, no data points, nothing at all.  My favorite though, and this happens a lot, is when entrepreneurs say, "I have no idea what my company is worth, but I'd never sell for less than $X!"  Now what am I suppose to do with that statement?

I think you are making a big mistake when you rely solely on standard business valuation techniques to determine your company's worth in an acquisition.  Most of these methods were developed for ongoing business valuation events like taxes, ESOPs, splits, etc.  They're not appropriate for determining value in a change of ownership and can't stand up to the scrutiny that I put on them.

Be smart and be ready - have three to five pieces of intelligence ready to discus with passion and the valuation data to tie to it.  Good examples that I've seen are:

1. A CEO used three separate research report metrics (based on actual historical data) to show increasing adoption rates for a new product due to the convergence in two of the metrics and a fall-off in the third.  Her thesis was that the company was well-positioned to take advantage of these three trends and backed it up with revenue data that showed increase sales into that market.  Beyond that, she showed emails from several new clients confirming the research data as the primary driver to purchase.  She went further and showed her SFA reports detailing an increasing pipeline of similar potential clients in various stages.  Then she says sheepishly, "Because of this, we're kinda lookin' to sell at the top of the multiple range."  Of course when I pressed her she knew the exact range.  She got her money.
2. I represented an acquirer in talks with start-up that had a very disruptive technology and a passionately aggressive founder/CEO.  When we met with him to discuss what it would take to sell his company, he simply pulled out a sheet listing all the sales deals they had lost that year.  It was an impressive list - Fortune 500 buyers and A-list competitors.  It told me that these guys could play with the bigs.  Then he handed us a stack of printed emails.  With each loss he had asked the decision maker to rank their product vs. the competition and give details as to why they had lost.  In almost every case, his product ranked #1, but they always lost due to a lack of sufficient integration resources, account management and product support.  He then showed me that he was about to close on another funding round - his largest yet.  He understood that his company's weaknesses were my client's strengths, but he also knew how much it would cost for my client to build his product and how much it would cost him to build-out his weaknesses.  He also got his money and then some, but he never once pulled out a comp table or a DCF.