The three most often used valuation methods for acquisitions are public comparables, precedent acquisitions and discounted cash flow. Remember, my two most important rules in valuation are to build a case for your argument and to do so using intelligence rather than just data. We'll focus on public comps in this post and hit the other two methods later this week. Public comps are the simplest to calculate and understand but are often used in a manner that violates my aforementioned rules.
Valuation meetings often get a bit rambunctious. I always come extremely prepared, so should you, but sellers seldom do. I always stay extremely calm, so should you, but entrepreneurs never do. I watch closely how you negotiate valuation, as it's a good barometer on how you'll handle the rest of the deal. If you become irrational and pull a Howard Dean, the deal will probably die, as I don't need to put up with that for the next few months. If the meeting is not going well for you, control your emotions, take a break to regroup, come back and collect as much information as you can about my case and then say you need a few days to think about it. Then decide if you can build a better case with intelligence applied to your data. I'm always happy to meet with you again.
Here's is the mistake most often made with public comps. You and you banker pick a handful of publicly-traded companies that you both feel are the best proxies for your company as a listed entity. Oh, actually you don't, you simply pick a bunch of high-fliers and average their trading multiples, but you leave it at that. Your picks are usually about 50x your size and chances are you rarely face or win against them. What you do wrong is to leave out the low-liers and assume I don't know about them. But remember I came extremely prepared and know a lot about both the high-fliers and the low-liers. I not only know all their trading multiples, but I also have other intelligence like growth rates, win frequencies, strength in verticals, revenue per employee, R&D spends, strategies, etc. And I'm ready to discuss how those compare to your company. At this point CEOs usually give a speech about how the low-liers couldn't hold a candle to their company and that they win every time they face the low-liers. Fine, get your Sales VP on the speaker phone and tell him/her that I'm from your auditing firm and what to discuss your year-to-date pipeline to find out who you competed, won and lost against. I've yet to have a taker on that one. This is the point in the meeting where CEOs usually go a little Howard Dean on me.