How to Value Your Company for Investors
For an entrepreneur or business owner seeking equity, one of the biggest initial challenges lies around attaining a solid and realistic company valuation.
Not only is it hard to know where to start, it is also critical business owners achieve as accurate a valuation as possible. Getting it wrong can have a hugely damaging impact on how the company is assessed and what they are offered by way of investment. Here Duncan Di Biase, Co-Founder of investment consultancy Raising Partners, which has recently launched a free Valuation Calculator, demystifies the process for those thinking of approaching investors for finance.
Securing an accurate company valuation can mean the difference between success and failure when it comes to raising business investment. It is a key first step for entrepreneurs needing to establish the right funding route for them and to come to investors armed with informed expectations. However, for many entrepreneurs and small business owners, the road to finding an accurate valuation can be something of a minefield. Many valuation calculators currently on the market can be extremely expensive and can also give a completely inaccurate picture of a company’s worth, hindering entrepreneurs’ ability to make the decisions best for their business.
Securing an accurate company valuation can mean the difference between success and failure when it comes to raising business investment.
In addition, providing investors with an inaccurate initial position can negatively impact future rounds of investment. A first investment round is generally a foundation to future rounds and so the initial company valuation very much sets the tone – from first round, right through to when you sell. Getting your valuation wrong can have a profound impact on your investment strategy and the way investors see your business.
“It is something we often see entrepreneurs get wrong” says Duncan Di Biase Co-Founder of Raising Partners. “They are, in many cases, completely in the dark about how this should be achieved, and how to get started with the valuation process. But there are some simple steps they can take in order to get it right. The following three metrics are a good place to start.”
Revenue to date
How much revenue you have generated to date is key when it comes to calculating your valuation. It gives investors a solid insight into what you are capable of achieving.
How much profit your business is generating (or is forecasted to generate) is a metric we use for analysing a discounted future cash flow – a common method for assessing company valuations used by investors. Ultimately your business isn’t sustainable until it is generating a profit, and although we’re realistic that this can take some companies longer than others, having a clear path to profitability is vital.
It’s often the case that you might find yourself needing to raise investment prior to generating any revenue. In which case, we’d look at your future forecasts in order to generate a valuation. It’s important to remember however that when you are forecasting financials you need to have a robust set of assumptions behind your figures so that you can explain to investors how you reached them and why you think they are achievable.
While these are a good starting point, a truly accurate valuation will also always include qualitative data, such as the wider industry context and intellectual property.
In the end, the value of your business is what someone is actually willing to pay for it, so it is wise to also research what sale price your competitors may have achieved at the same financing stage. This will give you the added confidence, alongside your valuation, to fend off any attempts by investors to bring your worth down in order to obtain more equity for their investment. Be prepared by being forearmed with an accurate and researched valuation.