Entrepreneur's gut value: $15 million
Len Green's value: $10 million
Mary O'Connor's value: $10.5 million
When it comes to Infinite Conferencing, W. Keith Maddox is proud of many things. He's proud that the Millburn, N.J.-based company, which provides teleconferencing, Web conferencing, and webcast services, has gone from revenue of $500,000 in 2002, the year it launched, to $5 million in 2005. He's proud of a customer base that has swelled to some 1,300 small and midsize businesses. He's proud of gross profit margins of some 80%. And he's especially proud that he's been able to accomplish it all without borrowing a dime.
But Maddox and his partner, Deborah J. Jackson, are at a crossroads. Their company is approaching maturity, and maintaining high growth rates could mean taking some risks--such as taking on a financial partner or making an acquisition. Selling the company outright is another option, as is continuing to grow organically, without making any sudden moves. Whatever they decide, a better sense of Infinite Conferencing's worth will give the pair an edge in dealing with potential partners and investors; they'll also be smarter about evaluating any offers. And then there's simple curiosity. "As an entrepreneur, you're always wondering, what's the value of this thing I own?" Maddox says. Infinite Conferencing underwent a formal evaluation in 2004, which came in at about $6 million. The number struck Maddox as far too low, mostly because his margins are so much stronger than the industry average of about 60%. "My gut is that we're in the $15 million range," he says.
Green first focused on where Infinite Conferencing sits in the product cycle. He was particularly drawn to its Web conferencing business--which increased from 1% of sales in 2002 to 24% in 2005. On the other hand, after researching the industry, he found at least 260 conferencing providers in the United States alone. The large telecom companies control about 30% of the market. And one company, WebEx, has captured 50% of the Web conferencing market. WebEx, which is publicly held, trades in the range of three to four times revenue. Infinite Conferencing is puny by comparison, but it could make an attractive acquisition for a large player looking to get into Web conferencing, Green thought.
He set the research aside and began his conversation with Maddox with one key question: How did he plan to handle the company's success and profits? Did Maddox plan to expand? Or was he content to stay put? It's something Green always looks for when evaluating a successful going concern: Does the owner still have drive? In Maddox's case, "I sensed a real passion for what he was doing and how he was doing it. I bet on a guy like that every time."
Green's standard approach to valuing an established firm is to take the company's present revenue and add or subtract value based on his assessment of the company's future. Green's floor value was the company's projected revenue for 2006: $6.6 million. Since companies in the phone and Web conferencing sector generally sell for about two to four times revenue, the top value that Green would consider was $26.4 million. But it's rare for a small firm to sell at such a high multiple, and Green's impression was that the real value in Infinite was not in telephone conferencing but in Web conferencing. Given that, Green decided to apply a multiplier of two times sales. That brought the number to $13 million.
But Green had concerns about Infinite's relatively small stature, which could make it hard to compete in a rapidly consolidating industry. In fact, he was so concerned that he lopped about 20% from the company's value. He also took into account worries that Infinite didn't have anyone on the bench who could step in and handle the management, marketing, and finances of the company if Maddox were to leave. His value of Infinite today: $10 million.
This time, O'Connor's job was easy. "Infinite has a profitable track record, a likely future return, a risk level that can be reasonably assessed, and an active merger-and-acquisition market," she says. She interviewed Maddox and listened as he explained the good news about Infinite's growth and profitability. But she was interested not only in what he was saying but in how he was saying it. When a company has a good story to tell, she keeps a keen ear out for exaggeration--which inevitably knocks down her value. With Infinite, she felt that she wasn't being sold a bill of goods. "They're not talking about sales doubling every 10 minutes, and they have a believable plan, which I felt they could handle and control," she says. "They have a view of the future that makes economic sense." She came away with a good impression of both Infinite's management and its business plan. On the flip side, as she delved into her research on the industry, she had concerns over competition--and also over Infinite's small size, which put the company at risk of being stomped on by larger rivals.
In her calculations, she again took the position of a potential investor. Given the company's strong margins, she assumed that it would command a multiple of 2.5 times current revenue, which would bring the value to about $10.5 million. But, she points out, a potential acquirer of Infinite might value the company higher if it fit into the acquirer's business plan in a strategic way. "The premium could be as much as 100%," she says. "Depending on who it was acquired by, the difference in value could be quite amazing."
"These [values] are consistent with other deals that have happened in the industry in the last 12 months," Maddox says. "So they're right in range." But just as with his prior appraisal, Maddox remains frustrated that his company's revenue is subject to such a low multiplier and that Infinite does not get credit for its rapid growth rate and strong margins.
Nor do the appraisals settle the question of Infinite's next move. "Maybe the only really relevant valuation is how much someone is willing to pay for the company," Maddox muses. "If we do decide to sell, or take on a financial partner, we'll need a partner that's willing to pay a premium over these valuations." Indeed, at a value of $10 million, "we're not only not interested in selling, we're not interested in a financial partner," Maddox says. "We're much more likely to grow our company organically, if that's what the market thinks our company is worth."