Rules Of Thumbs

Most large corporations require approximately 9 months to identify an acquisition target.  Once a corporation has defined its strategy and identified a target area for acquisition, it typically takes about 9 months to identify the players in the space, conduct preliminary due diligence, gain necessary internal approvals, and negotiate an LOI (letter of intent).  Once the LOI has been signed by both parties, it will usually take 1-2 months to complete due diligence and negotiations so that a Definitive Agreement can be executed.  Including this time, a corporation may take as long as a 1 year to complete an acquisition.

In general, if you don’t go to a top tier business school, it is not worth quitting your job to go.  You should instead go to an executive MBA program to get your degree or do an online program for your business degree. 

A product or service needs to have an Average Selling Price (ASP) of at least $200,000 to justify a direct sales force.  Anything less than $200k needs to be sold via partners, channels, or inside sales.   This should be helpful in developing business models for start-up companies, particularly in the enterprise software space.

On average, corporations overestimate their revenue forecasts by 37%.  This is according to a study by Mankins & Steele, Harvard Business Review (HBR), August 2005. 

One rule of thumb for valuing an insurance company is to apply a multiple to Statutory Policyholder Surplus. In recent years (2002-2005) this has been between 1x and 2x.

For a company that is growing at a steady-state rate, 10x EBITDA (earnings before interest, taxes, depreciation, and amortization, see rule of thumb: Cash Flow). This is essentially providing you with a proxy for a financial valuation theory known as the Dividend Growth Model. This theory states the value of a company is given by dividing its annual cash flow by the appropriate discount rate less the company s growth rate. Therefore, the 10x EBITDA rule of thumb comes from dividing the current years estimated cash flow by a 10% (net of growth) discount rate.

Cash flow can be estimated by the financial measurement known as EBITDA. EBITDA is used as a rule of thumb for cash flow. It stands for earnings before interest, taxes, depreciation and amortization. Essentially, it estimates cash flow by trying to add back all non-cash expenses to a firm s net income. However, since it doesn t take into account capital expenditures or changes in net working capital, it should be used only as an estimate and works best with companies that are in a steady-state.