Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

One of the most frequently asked questions I receive from people buying or selling a business or raising money is: how do I value the business?

Building a thoughtful valuation for a business requires access to data that is not public.  And it isn't cheap or free.  Professionals use data sources, like Venture One and Mergerstat, but don't stop there.   We typically add public data, carefully culled from SEC filings, to gauge values for public companies.

We don't just grab the data, but analyze its relevance for each use, taking into account differences in company size, the age of the data and other variables that can impact significantly the data we're reviewing.

Professionals also like to use a discounted cash flow analysis, which incorporates forecasts of future cash flows, discounted to their present value.  That said, I find the exercise more valuable as a means of confirming other data than of actually valuing a business.  Market data is much more meaningful.

Today, VentureOne reported that the total of venture capital investments made in the U.S. increased by a modest 2.2% to $22.13 billion in 2005 from $21.65 2004.   One interesting note was that the number of venture deals actually declined by 10 from 2,249 to 2,239.  Fourth quarter numbers improved slightly more than the full year numbers, showing a 2.6% increase in funding dollars in the 4th quarter of 2005 over the 4th quarter of 2004, while the number of fundings increased just more than 1.2%.

The import of the decline in the number of 2005 deals associated with an increase in total funding is the 2.7% increase in the average deal size from $9.62 million in 2004 to $9.88 million in 2005, suggesting  that:

1)  It is just marginally more difficult to get a deal done in the current venture climate. 

2)  Later stage deals are getting easier to do...

3)  ... while earlier-stage deals are getting more difficult.

What is your experience?