There is a common method used in mergers and acquisitions that can help determine the fair market value of your company. FMV is the only price for which you can sell out; nobody wants to be in on a deal where fairness is not taken into account.
The idea is to create an equation where you can plug in your company’s “numbers” to arrive at FMV. Generally, a buyer who wants to disclose his valuation methods refers to a multiple of revenues or profits. This should equate to what they claim to be the FMV of your company.
Often, industry players create commonly known multiples for companies who have similar histories, financial results, and corporate structures. Irrespective of market makers’ attempts to homogenize companies, once you review any of them in detail you’ll find that all companies and deals are truly unique and therefore require dynamic human and industry research, abstract insight, and a diligent work effort to discern the information you will need to make or receive a merger offer. For a small Internet company, a popular multiple is eight years of the company’s profits (an 8X multiple). If you succeed in selling your company for a multiple of eight times your annual profits, you get the earnings of eight years hard labor (assuming no growth) in one payment (or however many payments you agree to). In addition, you can compound all that money for the eight years you would have otherwise been working, while saving all the opportunity cost and time to perform another mission of equal or greater importance or profitability.
This same company may have a 25% profit margin; therefore, their revenue would be four times as high, making their “multiple to revenues” equal 2x to go with the 8x “multiple to profits.”
