Three-Way Company Valuation

A framework for valuing companies based on three distinct methods, as explained by James Altucher from his experience selling multiple companies.

Method 1: Industry Multiple Valuation

• Take standard industry earnings multiple
• Cut the multiple in half (buyers want deals)
• Multiply by last year's profits
• Example: If industry trades at 20x earnings
  • Cut to 10x earnings
  • Multiply by company's profits

Method 2: Potential Earnings with Acquirer

• Calculate potential value post-acquisition
• Based on acquirer's ability to monetize
• Key considerations:
  • Negotiate formula carefully upfront
  • Understand variables thoroughly
  • Acquirer usually knows variables better
  • Need to ensure variables align with desired outcome

Method 3: Comparable Acquisitions

• Look at similar companies sold in the space
• Compare relative sizes
• Common in tech sector
• Less tied to actual earnings
• Example given: Giphy acquisition
  • Valued based on Tenor's sale to Google
  • Not based on earnings (likely losing money)

Important Notes

• No single "right" way to value
• Different methods work better in different situations
• Tech companies often use Method 3
• Profitable companies typically use Method 1
• Always expect buyers to negotiate down
• Need to understand industry standards
• Important to know which method fits your situation