"What is the appropriate
valuation of my business?" It's one of the questions I get the most often
from aspiring entrepreneurs. And what usually sparks it is an upcoming
financing or pending takeover offer.
The answer is quite simple: Just as
with anything, your business is worth what somebody is willing to pay for it.
And the methodologies applied by one buyer in one industry may be different
from the methodologies applied by another buyer in another industry.
Here are some ways to value your
business in a way that will make sense to you and line up with investor expectations.
To start, let's not forget about the
obvious: The natural economic principles of supply and demand apply to valuing
your business as well. The more scarce a supply (e.g., your equity in a hot new
patented technology business), the higher the demand (e.g., multiple interested
investors competing for the deal, and taking up valuation in the process). And,
if you cannot create "real demand" from multiple investors,
"perceived demand" can often work the same when dealing with one
investor.
So, never have an investor think
they are the only investor pursuing your business. That will hurt your
valuation. And, before you start soliciting investment, make sure your business
will be perceived as new and unique to maximize your valuation. A competitive
commodity business or "me too" story, will be less demanded, and
hence require a lower valuation to close your financing.
Another important factor: the
industry in which you operate. Each industry typically has its unique valuation
methodologies. A next-generation biotech or clean energy business would get
priced at a higher valuation than yet another family diner or widget
manufacturer. As an example, a new restaurant may get valued at three to four
times earnings before interest, taxes and other items, and a hot dot-com
business with meteoric traffic growth could get valued at five to ten times
revenues. So, before you approach investors with valuation expectations, make sure.......
