The Two Year Rule When It Comes to Acquisition Offers

After reading about yesterday’s Salesforce.com proposed acquisition of RelateIQ, and the speculation that the purchase price was in the range of 100x run-rate, it reminded me a piece of advice I received when we were considering selling Pardot:

If you executed perfectly for the next two years, how much would the business be worth under normal market conditions? If you don’t want to sell, but would sell for an aggressive price, make it for what you think the business will be worth in two years.

At Pardot, we had about $10 million in trailing months revenue at time of acquisition. Based on our growth rate, not taking in outside capital, and our guess as to market conditions, we felt we could be at roughly $25 million in trailing twelve months revenue in two years. A normal Software-as-a-Service company, depending on a number of factors, is often worth 3-6x revenue. So, take $25 million in trailing twelve months revenue in 24 months and a 4x revenue multiple and you get $100 million. When the negotiated offer finally got to that price range we knew it was time to sell.

What else? What are your thoughts on the two year rule when it comes to considering acquisition offers?