Question: You’ve now got questions about the pricing of products and services. Do you want to tackle a tough one involving the valuation of a pre-funding startup in an M&A scenario?
Answer: What a hard and simultaneously easy question to answer.
Here’s the easy part. Charge what the buyer is willing to pay. It’s just like pricing anything else. You’re now thinking, “what an obvious yet useless answer.” I agree.
Pricing
Here’s the hard part – I don’t know. If you ask me what to price your new artificially intelligent, 4 legged robotic barking dog, I would give the same answer – I don’t know. I know the process, I don’t know the numbers and I don’t know the important attributes. (Well, I have some ideas, but I’m not an expert.).
A few weeks ago, David Newman was a guest on the podcast, Impact Pricing. He is an expert in his market – professional speakers. He can tell you the willingness to pay for different meeting planners and how they think about value and price – he is an expert in his market. You may want to find an expert in your market, valuing companies.
One unique characteristic about valuing a company (as opposed to a product) is you only need one (or a few) buyers. You aren’t looking for a mass market, you really don’t care what most people think – You only care what the people with the highest WTP think.
From a statistics perspective, my recommendation would be to get several potential investors to share what they think your valuation should be. Obviously, the more data points, the better. Graph those like you would a normal distribution curve. Unless you can capture a lot of data points, it’s very likely you can price higher than what your respondents told you. Then, look for the buyers who value your company the most.
Hope that helps at least a little.
**Note: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.
