why get a valuation?
Your business valuation is the most vital component of your deal. Your valuation will determine two critical things:
How much money you get from an investor
How much equity share you need to give in return
The higher the valuation of your business, the higher the amount of funding that can be raised.
The lower the valuation, the more ownership in your company you will need to relinquish to achieve the same funding.
HOW IS VALUATION DONE?
There are several methods available when valuing a business, and it is critical to use the most appropriate valuation methodology.
The three most common approaches to business valuation focus on i) the future cash flows of the business ii) the current profitability levels and iii) the net assets of the business.
Most investors are buying the future potential of your business, so the “projected cash flow analysis” is always a critical component. Your current “profitability levels” are also vital as many investors use these measures to apply current market multiples and estimate a comparable valuation. But in some cases, investors may be more interested in the assets of the company, in which case an asset-based valuation approach would be the most effective way to capture the true value of your business.
In short, the various different approaches will yield better or worse results, depending on the nature of your business and the type of investor you are targeting. It is critical to identify the best approach to adopt, and to assess the implications of the other methods. Only then will it be possible to prepare a well-structured, fully corroborated valuation that can be confidently presented to and discussed with prospective investors.
Using the wrong valuation method will inevitably give an incorrect value of your company; which can lead to a poor deal for your business. It is important neither to undersell your business nor price it so high that you lose investors’ interest.
A valuation is the story of your business. It paints a picture of the economic conditions which your business is operating in and the difficulties it has overcome. It includes measurable targets for future growth, and outlines what practical plans are in place to achieve them.
Having a credible valuation which both you and potential investors can have confidence in, is the first, vital step in the M&A process.
At the end of this stage, you will have a sophisticated and defendable valuation at your disposal, and will be able to confidently respond with the right answers to any investor questions.
Stage 2 of your M&A journey is about using your company valuation to source and attract the right investors for your business.