This post is based on the presentation David W. Rowat gave on January 23, 2021 to the Sauder School of Business entrepreneurial program at The University of British Columbia, affiliated with Creative Destruction Labs.
The COVID-19 pandemic has changed lifestyles, work styles, socializing, the economy and upset the way we live. It has accelerated the trend to remote work and virtual (all-remote) companies.
To date, only Strategic Exits has researched the impact on tech company exit transactions from the trend to virtual companies.
In this presentation we demonstrate the financial advantages that virtual companies hold over their bricks-and-mortar competitors. These advantages explain why virtual companies sell for more money in an exit transaction any why their Founders create more wealth.
We introduce the Founders’ Wealth Creation Formula:
FWC = (EBITDA * Multiple – LP) * F * (1-T) – EC where
FWC – Founders’ Wealth Creation is the amount of money the Founders take home when they sell their company,
EBITDA – normalized Earnings Before Interest, Taxes, Depreciation, Amortization and other non-cash charges to the Income Statement,
Multiple – the buyer determines the EBITDA multiple based primarily on the growth rate and also includes other quantitative and qualitative considerations,
Note that EBITDA * Multiple calculates the price that the buyer pays to acquire the company, or the Gross Proceeds,
LP – Liquidation Preference is the amount that a Venture Capital investor takes off the top before the proceeds are shared with the other shareholders,
F – the percentage of the equity held by the Founders,
T – the tax rate in percent paid to the taxation authorities on sale of the company,
EC – the exit costs to close the transaction paid by the Founders.
Here is the presentation to the Creative Destruction Labs course on Entrepreneurship at the University of British Columbia Sauder School of Business:
The presentation covers:
- the financial advantages of virtual companies over bricks-and-mortar companies,
- the derivation of the Founder’s Wealth Creation Formula,
- A financial comparison using the FWC to explain why:
- Virtual companies sell for more in an exit transaction,
- Virtual company founders generate more wealth.
- We also review the acquisition of a virtual company which recently sold for over $100 million in under 60 days which demonstrates these point.