How much is my business worth the importance of valuation
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Company valuations play an integral role in the development of an early-stage business or SME, and they carry significant implications for businesses that are in the process of raising capital. As such, we at Eureeca would like to shed some light on the valuation process and its importance for growing businesses. Questions to be addressed: What influences a company's valuation? How does a company valuation affect the funding raising process? What methods are available for determining my company's value? At what point should I attempt to valuate my business?
How much is my business worth the importance of valuation
- 1. eureeca.com How much is my company worth? The importance of valuation
- 2. eureeca.com Valuation is the total price of a company at a specific point in time In short, your company is worth what an investor is willing to pay for it (ie what the market says its worth) What is Valuation?
- 3. eureeca.com When should you valuate business? Entrepreneurs will look to valuate their company prior to raising funds, as the amount you want to raise determines valuation Raise just enough to achieve next milestone, and then come back with higher valuation Entrepreneurs should approach the negotiating table with a well formulated and supported valuation.
- 4. eureeca.com Why is it so Difficult? Valuation is more an art than a science While there are commonly used methods to estimate company value, rarely if ever are they the official Valuation of the company
- 5. eureeca.com Why is it so Difficult? Due to the factors mentioned earlier (market, industry comparisons, company performance, etc), valuation is very volatile and unpredictable Raising money puts a very un-ambiguous stamp of worth on what youve worked so hard to create
- 6. eureeca.com Difficulties for Early-stage Businesses For Early-stage businesses (which are almost always private), this is even more difficult: Lack of historical data Lack of effective comparables (reporting and like-to-like) Lack of proof of concept
- 7. eureeca.com A lot of it comes down to negotiation The market wants a winner its your job to convince the investor that their investment can lead to exponential growth Difficulties for Early-stage Businesses
- 8. eureeca.com Bottom Line Be reasonable value comes in with investment, so doesnt matter what numbers say, its about market validation No point valuing yourself high if no one invests in you
- 10. eureeca.com Valuation Methods Comparables/Multiples Discounted Cash Flow (DCF) Cost to Duplicate Berkus
- 11. eureeca.com Method 1: Market Multiple (Comparables) The market multiple approach values the company against recent acquisitions of similar companies in the market. This method is a VC favourite, as it gives them a good idea of what the market is willing to pay for the company
- 12. eureeca.com Market Multiple (Comparables) First, you find a list of the closest companies to you i.e. industry, size, market performance A multiple is then assigned based on financial figures, such as: EV/Sales EV/EBITDA
- 14. eureeca.com Market Multiple (Comparables) Advantages: Accurate and indicative of market demand This gets us closest to the answer above that valuation is what the market will pay.
- 15. eureeca.com Market Multiple (Comparables) Disadvantages: Difficult to find close multiples for early stage companies Private companies do not disclose figures
- 16. eureeca.com Method 2: Discounted Cash Flow Method The value of a company today is equal to the present value of the future cash flows discounted at a rate that reflects the riskiness of those cash flows.
- 17. eureeca.com Discounted Cash Flow Method In English, this means a company is worth today what it can potentially achieve tomorrow.
- 18. eureeca.com Relies on the Time Value of Money principle, which assumes that a dollar today is worth more than a dollar tomorrow Discounted Cash Flow Method
- 19. eureeca.com Discounted Cash Flow Method
- 20. eureeca.com Discounted Cash Flow Method Step 1: Forecast finance projections
- 21. eureeca.com Discounted Cash Flow Method Step 2: Determine discount rate This is based on risk and potential return of the business: For early-stage businesses this tends to range from 20 - 50%
- 22. eureeca.com Discounted Cash Flow Method Step 3: Apply formula
- 23. eureeca.com Discounted Cash Flow Method Advantages: Allows a company to value itself based on its future potential For companies with no comparables or tangible assets
- 24. eureeca.com Discounted Cash Flow Method Disadvantages: A very volatile method Forecasting is often inaccurate
- 25. eureeca.com Q&A
- 26. eureeca.com Method 3: Cost to Duplicate Assumes a company is worth how much it would cost to build another company just like it from scratch. The idea is that a smart investor wouldn't pay more than it would cost to duplicate.
- 27. eureeca.com Were in the shoe making business: $250,000 for 18 months development $50,000 equipment $150,000 labor costs Therefore, it would cost $450k to duplicate Cost to Duplicate
- 28. eureeca.com Cost to Duplicate An example of this is the Yahoo purchase ($164m) of Maktoob They bought it because it would take 18 months to build Arabic functionality
- 29. eureeca.com Cost to Duplicate Advantages: Easy and quick Disadvantages: Unreliable when it comes to intangible assets Doesnt measure the potential of the business
- 30. eureeca.com Method 4: Stage (Berkus) Values company based on the venture's stage of commercial development The further the company has progressed along the development pathway, the lower the its risk and the higher its value.
- 31. eureeca.com Method 4: Stage (Berkus) Often used by angel investors Quick, rough-and-ready range of company value
- 32. eureeca.com Stage (Berkus) Quality of the Management Team The soundness of the idea Whether there is a working prototype The Quality of the Board Product Rollout / Sales
- 33. eureeca.com Stage (Berkus) A valuation-by-stage model might look something like this:
- 34. eureeca.com Advantage: Quick and easy Checklist Disadvantage: Overly simplistic and generic Stage (Berkus)
- 35. eureeca.com Q&A
- 36. eureeca.com So What Can You Do?
- 37. eureeca.com Combine DCF = 1,000,000 Multiples = 750,000 Berkus = 1,500,000 Duplicate = 500,000 Take an average: $900,000
- 38. eureeca.com Tell a good story A valuation is only as good as you can sell it an investor is really interested in what a business can become rather than what it is now.
- 39. eureeca.com A final takeaway Be reasonable value comes in with investment, so doest matter what numbers say, its about market validation Valuation is also contingent on the terms more generous terms can yield a higher valuation.
- 40. eureeca.com Q&A
- 41. eureeca.com Thanks for attending. We hope you enjoyed it. (Dont forget to fill in the four-question survey.)