Negotiating the highest valuation for your startup can be tough, but with the right approach, you can maximise your startup's value and secure the investment you deserve.

If you’re starting to get interest in your startup from potential acquirers, congratulations. It’s clear that your hard work and sacrifices have been worth it, and acquirers are willing to pay a potentially life-changing sum of money to you.

But don’t start celebrating just yet. The jump from getting interest in your business to completing the deal is big. Merger and acquisition (M&A) deals usually take four to six months to complete, and that’s if everything goes swimmingly. You’ve got a lot to do in the meantime, and one of the most significant parts of the process is negotiating the value of your startup.

If you’re about to start valuation negotiations with potential buyers, Foundy is here to help. While our M&A marketplace makes the acquisition process far quicker and more straightforward, we want to do everything to help. That’s why we’ve put together this guide to startup valuation negotiations and the things you can do to ensure you make the most from your deal.

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Understanding startup valuation methods

Before jumping into negotiation tactics and strategies, it’s essential to understand valuation methods. Whether you’re dealing with a venture capital firm, angel investors or another business, how they assess the value of your business will be different from how you do. As a startup founder, your valuation will naturally be guided by your experience of the business and your vision for its future. But investors will take a more objective view of your business as it currently is.

As acquirers will value your startup differently, it’s vital to understand their valuation methods before entering negotiations. There are several startup valuation methods to be aware of before you go into value negotiations for your startup company:

Risk factor summation method

The Risk Factor Summation Approach assesses any risks that can affect an acquirer’s return on investment (ROI). Through this method, an estimated initial value for the startup is calculated, and risks add to or reduce that value. Some of the risks taken into consideration include:

• Management risk

• Manufacturing risk

• Market competition risk

• Technological risk

Entry cost / Cost-to-duplicate approach

The Cost-to-Duplicate Approach is a valuation method that considers the costs of a startup and product development to assess how much it would cost to recreate the business. As the name suggests, it’s a way for potential buyers to see how much it would cost to duplicate the company by taking into account:

• Running projection statement

• Future sales and growth

• Brand value

• Patents

• Customer base

Berkus method

The Berkus Approach was put together by an American investor and venture capitalist called Dave Berkus. It bases the value of a startup company on five success factors:

1. Basic value

2. Technology

3. Execution

4. Strategic relationships

5. Production and sales

By evaluating how much value each of these factors has, acquirers can put together the total value of a startup. This approach is also sometimes called the Stage Development Method/Approach.

Future valuation method

Business acquirers use the Future Valuation Method not to assess the current value of a business but to see its future potential. Acquirers use this to calculate their return on investment over a set period. This calculation is based on projections, including:

• Growth projections

• Cost and expenditure projections

• Sales projections

As you can see, there are plenty of methods for valuing startups. Venture capital firms will use different valuation methods depending on several factors, including:

• Your company’s future potential

• Revenue growth

• Physical assets

• Brand value

• Cash flow

Founders need to ensure they have an accurate and reasonable valuation and understand valuation methods before entering negotiations. Going into negotiations without a good grip on popular startup valuation methods means more experienced venture capitalists can easily blindside you.

But just understanding valuation methods isn’t enough to ensure you get the best deal possible. We’ve put together the three best ways to negotiate a higher exit price for your startup.

5 ways to boost your startup valuation during negotiations

1. ) Ask for it

It might sound obvious, but an often overlooked but obvious part of the valuation process is to ask for the price you want. Although you should avoid overestimating your valuation, you should remember that this price is just a guide and may not always accurately reflect the best price you can achieve. 

Decide on a high price, acceptable price and a cut-off, walk-away point. This will give you room to manoeuvre, whilst still offering the buyer options so no-one feels backed into a corner. 

2.) Build a friendly relationship with potential buyers

In most acquisition events, the buyer sees value in the company’s reputation, customer base, team and other assets. Therefore, a good working relationship between the buyer and the founder is key. Even if the founder does not stay in a full-time role after the acquisition, they may still need to be involved in advising and supporting growth. 

Showing the buyer that you are cooperative and willing to support the new owner may lead to a marginal increase in the valuation. In reality, this could convert into tens or even hundreds of thousands of pounds extra in additional payouts for shareholders. 

3.) Emphasise recent developments

A lot can happen in the negotiating period of your acquisition. If you have added material value; a new partnership, deal, or product launch, for example, then this is something you can use in your favour to negotiate a higher price. Anything that improves your revenue will affect the bottom line when it comes to negotiating your company’s acquisition. This is one of the reasons why it’s so important to stick to your organisation’s roadmap right up until the deal is signed. 

4.) Make efforts to de-risk the acquisition

During the acquisition process, your buyer will be trying to minimise risk as much as possible. They’ll be trying to ascertain if they’ve spotted a genuine opportunity, if they’ll be able to scale the business post-acquisition, and whether their assessments this far are accurate. 

You can help to alleviate some of their concerns by sharing as much as you can pertinent to the acquisition – metrics, deals, technology, and so on. 

5.) Be prepared to walk away

Any experienced salesperson will tell you that the key to successful negotiations is knowing when to walk away. When you’re selling a product or service, there will always be someone who tries to lowball you or offer unfair terms, and business sale negotiations are no different.

If you’re not prepared to walk away from these types of offers, you’re likely to lose money on the deal. However, if you’re willing to walk away from a bad deal, you’ll be in a much better position to negotiate from a position of strength. By being ready to walk away from a sale, you signal to the other party that you’re not desperate and are willing to stand firm on your price. This can often be enough to get them to improve their offer, and it can help you get the best possible deal.

Streamline Valuations with Foundy

Foundy has access to data from 1.1 million transactions, including funding rounds and acquisitions over the last few decades. We pulls this data from multiple credible resources such as Beaurhust, Capital IQ and others. If you are interested in a detailed valuation report then enquire today via: [email protected]