Exit Equation

The Exit Equation is a financial formula used to estimate the potential exit value of a company at a specific point in time. It's an essential tool for companies looking to achieve a successful exit or considering various funding, liquidity options, or growth initiatives.

Why the Exit Equation Matters for Tech Founders

For tech companies aiming for a first-class exit, or exploring funding options and growth strategies, the Exit Equation can be instrumental. It translates abstract qualities into a concrete figure, allowing for a quantified assessment of potential exit value.

What is the Exit Equation

It is expressed as:

Headline price = [unit] x [multiple]

Where:

  • Units: the economic unit being measured (e.g. revenue, EBIT, or in a strategic sale, it might be number of customers or users etc.)
  • Multiple: the valuation premium applied to the Units (e.g. the multiplier used to capture the current and future value)

Worked Examples

Software Company Example

With $10 million in recurring revenue and a multiple of 7 (based on market position, growth rate), the potential exit value is:

Headline price = $10 million x 7 = $70 million

Ecommerce Company Example

An e-commerce company with $5 million in EBITDA and a multiple of 8 (considering market position, growth rate, repeat purchases) would have:

Headline price = $5 million x 8 = $40 million

Key Notes

  • Consider a margin of safety in input assumptions.
  • Align the choice of unit with the company's industry, maturity, and value drivers.
  • Recognise adjustments to headline price (net cash/net debt) and various factors affecting the final value.

Benefits and Limitations

Benefits:

  • Simplifies complex valuation factors, making it ideal for tech companies.
  • Tangible measure of potential worth.
  • Strategic planning by identifying value drivers and areas for improvement.

Limitations:

  • Requires accurate market data and industry insights.
  • May need adjustments for market changes or unique business characteristics.

Conclusion

For tech founders seeking a valuable exit strategy or understanding their company's worth, the Exit Equation, combined with expert valuation reports and analysis, can be pivotal. It helps make informed decisions on value creation and work towards a successful exit.

Looking to understand your tech company’s valuation before your own fundraise or exit? At Clear Value, we help founders of tech companies use comparable reports with structured market data to make better decisions around valuation well ahead of any investment or liquidity event. Find out how we can help here.

Back to blog