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A Look at Transaction Value, Multiples, and Valuations: Page 2 of 2

Why a proper valuation is critically important when selling (or acquiring) your technology firm. By Reed Warren

The other misunderstood element is that the terms of the transaction determine the transaction value as much as the valuation. 

For instance, if the calculation of value starts the financial negotiations, the terms certainly finish the value conversation. Transaction values are determined by negotiating the risks and rewards of a given scenario. 

I don’t want to get lost in all of the levers that can be pulled to determine a transaction value but … to say that if a valuation on a firm produces a value of $10M and the buyer and seller agree to an all-cash transaction at close, the buyer may get as much as a 40% discount from the valuation based upon an all-cash transaction. In this case, the buyer is absorbing 100% of the risk of the success of the transaction.

In contrast, if the seller agrees to do the transaction as an earn-out based upon a future performance, the buyer may pay as much as twice the value determined by the valuation. The buyer is often willing to do this because the transaction is usually self-funding, and the buyer only pays when the seller performs.

Transaction multiples report what willing buyers and willing sellers are willing to do. The challenge here is that, as the report reader, you have no visibility into the specific risks or synergies or the terms of the transaction that produced the reported multiples, plus each transaction is different. I am not trying to create confusion, but valuations and industry multiples provide guidance and parameters, but can’t determine true value. 

True value is determined between a willing buyer and a willing seller based upon the specific synergies, risks, rewards, and terms of a transaction at a given point in time. 

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REED WARREN is CEO, Certified Valuation Analyst (CVA), and Value Builder Advisor at iT Valuations. During his 30+ years working in the IT Services and technology industry, he’s provided business strategy, consulting and M&A services (60+ successful transactions) to over 250 companies across 19 different countries. 

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