Think back to an episode of Shark Tank — an entrepreneur enters, passionately pitching their ideas and the features of their revolutionary offering. But the real battle begins when the sharks start asking about numbers: revenue, profit and the all-important valuation.
Many founders stumble here — some overvalue out of optimism, others shortchange themselves and lose out on a good deal.
Learning how to value your business for investors empowers you to negotiate effectively and ensure your business gets the fuel it needs to thrive.
Key factors that influence valuation
Investors meticulously analyse several factors before they decide to take a chance on your business. Here are a few of them:
Revenue and profitability
Consistent upward trends in your sales demonstrate a market appetite for your product or service — validating your business model. Profitability is also key, as it signals to investors that your company isn’t merely generating top-line revenue but is sustainable and capable of delivering a healthy ROI.
Market position
Where do you stand in the industry? Are you in a growing market with ample opportunity or a saturated field where competition is fierce? Your unique selling points (USPs) and the things that make you stand out also matter greatly. Investors want to know what gives you an edge and how you plan to defend your market share.
Assets
Assets are what your business owns, and they come in two forms — tangible and intangible. Tangible assets include physical things like property, equipment and inventory.
Intangible assets can be trickier to quantify but often hold immense value — think of IPs like patents, trademarks and your brand reputation. Investors want to see a healthy mix of both, ensuring your business has the foundations for growth.
Leadership team
Investors often say they bet on the jockey, not just the horse. Your management team’s experience, track record and expertise are crucial factors. Investors want to see a team with proven success, industry knowledge and the ability to execute the vision.
A strong management team builds confidence to navigate challenges, capitalise on opportunities and ultimately drive the company’s growth. Remember, just like in Shark Tank, investors seek not only a great idea but also leaders they believe can bring it to life.
Growth potential
Since investors are investing in your company’s future, outline realistic projections that demonstrate your business model’s capacity for expansion. Consider market size, scalability of operations and any planned product or service launches. A compelling growth story with achievable milestones is crucial for attracting investors who seek high returns.
Common valuation methods
While there’s no single “right” way to value a business, a few established methods provide a framework. Let’s dive into the most common ones:
Market multiples approach
This method compares your business to similar companies recently sold or acquired. Publicly available data on revenue or profit multiples are used to calculate a potential value for your business. For example, if similar businesses sell for 3x of their annual revenue, you can estimate your company’s value using this multiple.
Discounted cash flow (DCF)
The DCF method forecasts your company’s future cash flows and discounts them back to their present value based on a chosen discount rate. This accounts for the time value of money and the risk associated with future projections, making it a more complex but potentially accurate valuation method.
Asset-based approach
This approach primarily considers the fair market value of your business’s assets minus its liabilities (debts). It might be helpful when a company’s real value lies heavily in its tangible assets, such as real estate or equipment.
It’s important to note that these methods offer a decent starting point for valuation. Negotiation, market dynamics and the unique appeal of your business to specific investors often influence the final cost.
Get investor-ready with CFO On-Call
Learning how to value your business for investors is a crucial step, and it pays to have experts in your corner. At CFO On-Call, we provide comprehensive financial expertise to SME owners, including business valuation, cash flow management and business value improvement among others.
Traditional CFOs often have hefty price tags, making them an unrealistic option for many SMEs. With CFO On-Call, you get access to the same high-level financial expertise at a fraction of the cost. Our seasoned CFOs deeply understand investor expectations, ensuring you present a compelling case and negotiate the best possible deal.
Schedule a consultation to discuss your goals, or reach out to us for more information.
