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5 things Founders need to know about Company Valuations
Putting any sort of exit strategy or growth plan into action requires a crystal clear valuation that instills confidence – especially in a constantly-fluctuating market. A solid company valuation is based on looking at past company history and gathering critical information relevant to building an accurate figure that would be would used as the basis for any form of negotiation in the case of a merger, acquisition or investment.
We look at 5 critical things that Founders need to know about Company Valuations
1. Pricing high is not necessarily the best option
A common mistake that many founders make is assuming that a high price is the best price, and that the best price is the most impressive and attractive to potential buyers or investors. However, things quickly become unstuck further down the road, when the business is expected to perform against those measurables and inflated valuations resulting in deals becoming shaken, or worse, investors changing course. And yet, as much as we think this is a rather obvious fact, the reality is that it is still happening (and perhaps even more so) today. With layers of data and technology, inflating and exaggerating value becomes commonplace – and we’ve seen a surge of this happen with companies who want to secure IPO. Just take a look at what happened with the US IPO market this year. Remember that whatever valuation you put forward today, you will be expected to feed into that valuation in future financing rounds.
2. Future growth potential doesn’t increase the value of the business but may make it more marketable.
Although funds and investors are very interested in growth potential and what rewards their investment may achieve in future years, for many, forecasted projections serve as a temptation, and not necessarily the bottom-line in their decision-making process. Proof of profits, consistent cash flows, and a solid operational base is what buyers will pay for and what investors will invest in. Future potential is not. Where future potential does become interesting in acquisition is through strategic opportunities like accessing new markets, or product ideas that may not have made it to market yet, but which compliment an existing growth plan.
3. A little bit of extra marketing will not necessarily make your business more profitable
It has been said that, in order to demonstrate profit potential, business owners often argue that their business could be more profitable with additional marketing activities. The single multiplier. The “if I do what I do now, in 5 other reasons, then I increase my profit 5 times”, argument. But that’s not how it works. Investors, funds and buyers will want to see a demonstration of that methodology. Unless there is a strategic decision to invest into your business, they will be far more interested in seeing actual cash figures and a historical demonstration of profit. They’re more interested in the amount of profit you’re making based on every pound of marketing spent.
If you aim to argue that your results are scalable, you’ll most likely be asked to prove that they are scalable by already working examples.
4. It takes longer to sell a business than you think.
Business brokers have estimated that the average length of time it takes for small businesses to sell in the UK (assuming it finds a buyer in the first place) is 9 months. Surveys have also shown that most business owners, when they decide to put their business up for sale, is a decision they make when they expect a deal to be made almost immediately. Very few have planned their strategic exit strategy, and because of this, are often under pressure to demonstrate a more attractive, a more profitable business, to catch the eye of a buyer.
Of course, the larger the business, the longer the process to go through the due diligence phase. Ensuring that your business is positioned accurately for a sale, is critical to seeing a successful result, and developing realistic expectations from the very first negotiation is a step in the right direction. The best place to start is to gain an independent, professional company valuation to help you establish those expectations correctly.
5. Your investor will most likely be looking for diversity
Any good investor will be building a diverse portfolio of businesses that compliment each other. It is unlikely that private investors will simply be putting money into just two or three companies. They will also be looking to diversify their investments to reduce risk and increase their odds of success. So, when you are looking to catch the eye of a particular investor, think about what it is that will make your business attractive to them. A solid, sound valuation will be a good starting point to build on.
Businesses have chosen CFPro to assist with company valuations in the IPO, fundraising and acquisition processes. Working with an independent professional advisor means that you get an accurate reflection on the true current value, as well as the true potential projection for the future. Talk to us about getting started.