The emergence of innovative technologies has seen entrepreneurs enter the tech industry at levels unprecedented since the dotcom boom. Optimism has been derived from the success of small ideas such as Snapchat Inc, Facebook Inc, Xero Limited and many more transforming simple communication or the mundane repetitive jobs that had barely changed for decades to become global companies in what seems like the blink of an eye. In the light of this a number of owners of tech companies, don’t broadly analyse a number of valuation factors and believe their companies would be valued with similarly high multiples, following the suit of the most innovative high tech companies in the world.
Know Your Company’s Value
The below table shows the price earning ratio of some of the biggest tech companies in the world.
Company PE Ratio
Apple Inc 18.6
There are a number of factors contributing to these company’s high multiples driven by analyst’s bullish predictions for the future. Analysts will look at exponential historical growth and have a significant number of factors that lead them to optimistically believe the companies have the ability to trigger or continue this type of growth into the future. Some of these factors include highly innovative R&D departments, a view products in the pipeline will be highly successful and the ability these companies have to reach and market on a global scale. A clear example of this is Facebook. The company almost doubled their revenues from US$153m in 2007 to US$272m in 2008 but were still returning a net loss, but Facebook had the business acumen and adaptability to ensure revenue growth continued and in 2016 revenues were US$27bn and profit reached US$10bn, a 17,000% increase in revenue from 2007. Now Facebook has over 1.15 billion mobile daily active users, and 2.07 billion monthly users, numbers which have grown 20% just in the last year. As touched on above the company’s historical growth, ability to innovate through one of the most highly skilled workforces in the world, and ability to turn users into revenues coupled with a multitude of other competitive enhancing factors is why the company is valued with such a high multiple.
A number of smaller tech company owners in Australia look at these types of multiples and often conclude that because they run a tech company their multiple will be somewhere between similar sized businesses in different industries such as food and beverage and the large tech companies like Facebook, which unfortunately is rarely the case. A company’s valuation is reliant on a number of factors, and companies with revenues of around $50m rarely sell for a multiple greater than 7 times their EBIT.
It’s important to take into account the factors that can lead to a high multiple, regardless of a business’ industry. If a company possesses leading expertise in a growing market, has a stable and a successful business model, it is potentially on its way to receiving a sale or realistic valuation multiple in excess of 5 times EBIT. These factors don’t discriminate on industry and unless a company with revenues around $50m has created a product or service that is almost certain to see revenues increase exponentially into the future the EBIT multiple for the sale or valuation is unlikely to be greater than 5 times their profit.
Find Out More
Quinn M&A’s expert team of business transaction advisors can assist you to with all company valuations. Contact Quinn M&A today on +612 9223 9166 or submit an Express Enquiry to arrange a confidential no cost consultation with one of our Senior Advisors.