Valuation Of A Tech Company In A M&A

M&A valuations are used in determining the purchase price of a target company. There are two fundamental principles in M&A valuations. The Buyer wants to purchase at the lowest value, and the Seller desires to receive the highest value. The traditional method of valuation is to analyze past performance. Start-up Tech companies are in a unique position in which they do not have a past performance to analyze. Nevertheless, tech M&A transactions are continuously placed at a high value. This is done by comparing the start-up with established tech companies which are similar in kind. [1]

In this market-based valuation method, investors look to the price of acquisitions in recent transactions of similar companies. Market Multiples allow investors to get an idea of what the market is paying for similar companies.[2] By analyzing similar companies, investors can forecast the future earnings of the startup. Also, investors can utilize these forecasts to make a backward projection to document potential growth.

Another Method of valuation of start-up tech companies is the Discounted Cash Flow (DCF) method. DCF estimates the value of a start-up tech company based on future cash flow. The present value of expected future cash flow is found by using a discounted rate. The startup is then valued at the present value estimate.[3] An acquiring tech company will consider buying the startup tech company if the present value estimated is equal to or higher than the cost determined by the market multiples and there is potential future growth.


[1] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[2] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[3] https://www.investopedia.com/terms/d/dcf.asp

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