I was recently reading a great blog post from Digital Exits, a business broker based in Los Angeles that has expertise selling digital companies. Their president, Jock Purtle, has been compiling exit data from 712 digital businesses that were sold over the last four years. In Jock's post, which he graciously allowed me to reshare with all of you below, I found the results very eye opening.
Most of the time, we are talking about high flying, venture capital backed startups shooting for the moon and "Unicorn level" valuations. Even when we are doing early stage venture financings, big multiples like 10x revenues can be used to value early stage businesses. But, what happens if you don't raise a lot of capital and you are growing a lot slower, or are running a lifestyle business. The exit multiples for digital businesses are materially lower.
In Jock's analysis below, we see that the average sale multiple for the digital businesses he studied was only 2.4x profits (not revenues). And, it ranged from 2.0x to 3.4x based on the type of digital business you had, where software businesses with recurring revenues getting a lot more than a simple mobile app business, as an example. This reflected the full gamut of companies from $0 to $10MM in revenues, where a small business would average around 2x profits and a large business could get closer to 4x profits, showing size clearly matters. Only 17 of 712 businesses were sold for over 6x profits (yet alone revenues).
Wow! What a reality check. If you don't strike it big, which you most likely won't as a risky startup, make sure your expectations are clearly managed in terms of what your business is really worth. The only silver lining here: If you are thinking about pursuing a rollup strategy, there could be a big arbitrage opportunity between the 2x-3x revenue multiples most successful, big digital companies achieve, and the 2x-3x profit multiples they could be paying for acquisitions along the way.
Thanks, Jock, for sharing your wisdom with our readers.
JOCK'S POST BEGINS HERE