Complex deals

As a CFO you are almost constantly involved in some form of M&A activity. In M&A activity, some deals are straight forward, while other deals are more complex. Complex deals are transactions that involve intricate structures, multiple stakeholders, significant capital, or unconventional strategies. Characteristics of complex deals are (not exhaustive):

• High financial value: Deals often involve billions of dollars and require significant risk management and financial structuring.

• Multiple stakeholders: Requires negotiations with diverse parties such as companies, investors, governments, regulators, and lenders.

• Cross-Border transactions: Includes navigating legal, cultural, and regulatory environments across different countries.

Complex deals are not just about large sums of money; they also require:

• Strategic foresight to predict industry trends.

• Negotiation skills to align stakeholders with divergent interests.

• Risk management to navigate financial and operational uncertainties.

• Legal and regulatory acumen, especially in international transactions.

Valuing users, subscribers and customers

In recent years, there has been a shift in how companies, particularly in the tech and social media sectors, are valued. Traditional metrics like total revenues and cash flows are still important, but for companies such as Uber, Facebook, and Netflix, the focus often begins with their users or subscribers. While we maintain that long-term value ultimately derives from cash flows, the path to achieving those cash flows increasingly hinges on user acquisition and engagement.

This trend is even more pronounced in pricing, where many investors now evaluate social media companies based on user numbers rather than conventional multiples of revenue or earnings. However, this shift brings challenges, particularly in valuation and pricing practices. For example, Facebook’s vast user base—exceeding 2 billion by the end of 2017—and its detailed data on user preferences attract advertisers eager to pay for targeted ads. This has driven a robust online advertising revenue stream with high operating margins, exceeding 50% in 2017.

In contrast, younger companies like X and Snap often boast significant user growth but struggle to generate comparable revenues or profits. They argue that profitability will come with time, though this remains to be seen.

The reliance on user growth is not limited to social media. Netflix, for example, emphasizes subscriber growth in its earnings reports, with over 100 million subscribers by the end of 2017. Similarly, Amazon has leveraged its Amazon Prime subscription model, which had 100 million members by the same year, to drive growth and create value across its retail and entertainment divisions. Even traditional software companies like Microsoft and Adobe have shifted to subscription-based models, with offerings like Office 365 and Creative Cloud replacing one-time software sales.

For investors and analysts evaluating these companies, there are three approaches to consider:

1. Stick with conventional aggregated models, capturing the benefits of user growth through revenue and operating margin forecasts, while accounting for the costs of user acquisition as reinvestment.

2. Estimate the value of individual users or subscribers based on intrinsic valuation principles or standard pricing methods, and aggregate these values to assess the company as a whole.

3. Combine the two approaches, using conventional forecasting methods while explicitly linking projections to user numbers, factoring in acquisition costs and expected user value.

Each approach has its merits, and employing multiple perspectives can provide a more comprehensive understanding of these evolving business models.

A company`s financing stages

Every successful company goes through various financing stages to fund its growth, from the early days of an idea to potentially going public. Understanding these stages can help founders, investors, and entrepreneurs navigate the complex world of business funding. Here’s a breakdown of the key financing stages a company typically goes through.

1. Pre-Seed Stage: The Idea Takes Shape

At this stage, founders work on developing their idea, conducting market research, and building an initial prototype. Funding often comes from personal savings, friends and family, angel investors, incubators, or early-stage venture funds. The amount raised is usually small, ranging from $10,000 to a few hundred thousand dollars.

2. Seed Stage: Laying the Foundation

This is when a startup develops a minimum viable product (MVP), validates market fit, and starts acquiring early customers. Seed funding typically comes from angel investors, seed venture capital firms, accelerators, or crowdfunding. The amount raised is usually between $500,000 and $2 million.

3. Series A: Scaling Begins

The company starts scaling its product, expanding its team, increasing revenue, and refining its business model. Series A funding is usually provided by venture capital firms, corporate investors, or super angel investors, with amounts ranging from $2 million to $15 million.

4. Series B: Growth & Expansion

At this stage, the focus shifts to expanding into new markets, optimizing operations, and increasing customer acquisition. Larger venture capital firms and private equity investors provide Series B funding, which typically ranges from $10 million to $50 million.

5. Series C and Beyond: Achieving Market Dominance

The company aims to dominate its market, expand internationally, or prepare for an exit, such as an IPO or acquisition. Late-stage venture capital firms, private equity, hedge funds, or corporate investors provide funding, which can be $50 million to hundreds of millions.

6. IPO or Exit: The Big Payoff

Companies either go public via an Initial Public Offering (IPO) or get acquired by a larger company, allowing investors and founders to cash out. The amount raised during an IPO can reach hundreds of millions or even billions, depending on the company’s valuation.

Additional Rounds: Series D, E, and Beyond

Some companies raise additional rounds if they need more capital before exiting. Others may turn to debt financing instead of equity to fuel growth without diluting ownership further.

Final Thoughts

Each financing stage presents unique challenges and opportunities. Understanding these phases can help startups prepare for fundraising, attract the right investors, and make informed financial decisions. Whether you’re an aspiring entrepreneur or an investor, knowing how these funding rounds work is crucial to navigating the world of business growth and success.

Valuation multiples

The standard approach to valuing companies is Discounted Cash Flow method. But sometimes it is required to use a quicker method, e.g. using valuation multiples. Valuation multiples are financial ratios that relate a company’s market value to a key financial performance metric, such as earnings, revenue, or book value. They provide insight into how much investors are willing to pay for each unit of a company’s performance or assets.

At their core, multiples are shorthand for valuing a company by comparing it to peers or industry standards. They’re widely used because they are intuitive and provide a quick snapshot of relative value.

There are two main categories of valuation multiples: equity multiples and enterprise multiples. For private companies, enterprise multiples are most relevant. These are the two most common:

Enterprise multiples consider the entire value of the business, including debt. These are especially useful for comparing companies with different capital structures. Examples include:

• Enterprise Value-to-EBITDA (EV/EBITDA): Compares enterprise value (market capitalization plus debt, minus cash) to earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s a popular metric for assessing operational performance.

• Enterprise Value-to-Sales (EV/Sales): Compares enterprise value to total revenue. This is often used for high-growth or early-stage companies that may not yet be profitable.

The valuation multiples has some imitations, but can be used for example for peer comparison.