Why Virtual Companies Sell for More Money

BY David Rowat

Online presentation to the TechDays – NY   November 18, 2020

Virtual (or all-remote) companies perform better than their bricks-and-mortar comparables.  They have many advantages, including lower facility and admin costs which make them more profitable and able to grow faster.  They can attract the best worldwide talent because there are no geographic barriers in the virtual world, workers have a flexible life/work balance, and they like to work with other world-class talent, often for less compensation … all of which makes them more valuable to Buyers.  Because they need to raise less money, Founders are not as diluted … which means the Founders keep more of the exit proceeds.

 

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We derive the Founders’ Retention Formula:

FR = (EBITDA * Multiple – LP) * F * (1-T) – EC   where

FR – Founders’ Retention 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

EBITDA * multiple is the price the buyer pays to acquire the company

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 exit transaction paid by the Founders.