Right after writing about the basics of valuing a business, I read another piece on valuations that make a great follow up. This piece is about the mistake of establishing a company's value based upon its revenue stream. Revenue is NOT income, folks. I'm always amazed with how many people make that mistake. Revenue is what you take in from your sales. Income (or earnings) is what's left after all your expenses have been taken out. *Cash flow is something altogether different and will be tackled later.)
Don't let the mathematical formula and charts scare you. Bill Gurley, a Silicon Valley venture capitalist and former Wall Street analyst, has written a readable piece about Price/Revenue valuations. His blog posting explores the dangers of looking at revenue streams in a vacuum. "All Revenue Is Not Created Equal" is a good piece because it gets into the difference between sustainable revenue that can feed real profits and create true equity value vs. the crude measures used by people caught up in the hype. The article talks about the inputs to the revenue and how the company is really going to make money. He tells you the questions to ask, such as "What are their margins?" When companies are starting out and growing, margins change and forecasting expenses and capital expenditures can be very fuzzy.
That's why Gurley tells people to beware and to think analytically. Price/Revenue ratios can be as low as 4X and as high at 100X. So when you're looking at hot investments, or if you're looking for people to give you capital for your own business, think critically about the sort of multiple of revenue or earnings or EBITDA your business really deserves. Don't rely on hype. Do your homework.
Showing posts with label Valuations. Show all posts
Showing posts with label Valuations. Show all posts
Friday, May 27, 2011
Thursday, May 26, 2011
Valuing Your Business
What is your business worth? How much of your business should you give away when negotiating with investors?
These are two of the most commonly asked questions by entrepreneurs. While most valuations in start-ups are pretty much a function of negotiation with potential investors, there are still some good rules for determining a company's worth. The one you choose to use depends a great deal upon the circumstances and the age of your business, as well as the purpose of the calculation. Are you going to a bank to borrow money? Are you looking for equity investors? Are you looking to sell your business?
American Express has posted a short piece on valuation. It's worth reading, as it explains the most common methods: book value, discounted cash flow, publicly traded comparables, and transaction comparables.
http://www.openforum.com/articles/4-methods-to-determine-your-companys-worth
These are two of the most commonly asked questions by entrepreneurs. While most valuations in start-ups are pretty much a function of negotiation with potential investors, there are still some good rules for determining a company's worth. The one you choose to use depends a great deal upon the circumstances and the age of your business, as well as the purpose of the calculation. Are you going to a bank to borrow money? Are you looking for equity investors? Are you looking to sell your business?
American Express has posted a short piece on valuation. It's worth reading, as it explains the most common methods: book value, discounted cash flow, publicly traded comparables, and transaction comparables.
http://www.openforum.com/articles/4-methods-to-determine-your-companys-worth
Tuesday, June 23, 2009
Valuing Your Business
I'll admit it. When I read the Forbes article on valuing a flower shop, I thought of Eliza Doolittle in "My Fair Lady." The article "How to Value a Flower Shop" is worth reading because it uses numbers in its illustration and quotes research facts. The article really lays out the sorts of things that business owners or potential owners need to think about and pay attention to.
My clients often ask how VCs will value their business. This piece gives a good snapshot.
http://www.forbes.com/2009/06/19/flower-shop-valuation-entrepreneurs-finance-taulli.html?partner=smallbusiness_newsletter
My clients often ask how VCs will value their business. This piece gives a good snapshot.
http://www.forbes.com/2009/06/19/flower-shop-valuation-entrepreneurs-finance-taulli.html?partner=smallbusiness_newsletter
Friday, February 8, 2008
More on Demystifying Term Sheets
From the CVG Workshop on Term Sheets on Jan. 24, 2008 --
Business founders may not realize that investors will be looking for milestones to be achieved. That's why investors list milestones in a term sheet. Sometimes, they dole out the funds as the company reaches the milestones. This is called "staged closings." For example, if you have a dot-com, soft launches or hard launches can be milestones. As you negotiate, make sure your milestones are achievable.
Other things to know: Think about what you as a business owner are giving away to the investors. Is it worth it to you?
VCs usually want preferred stock so that their dividends can be accrued and they can get their money out before others. Preferred owners also get veto rights when voting on corporate matters.
VCs usually want to get their money out in 4-5 years. And they want a clear path to liquidity. The term sheets will have details about conversion of preferred to common stock. Remember that investors want to maximize their investment.
Most entrepreneurs think that they can raise capital quickly, but that's not true. VCs need to do background investigations into the company and the owners -- called "due diligence". Then, there's the negotiation of value and dithering over the term sheets. Once you've signed a term sheet, there's still a lag before you get the funds.
Keep in mind that more important than raising funds quickly is to make sure that your investors have deep pockets and will want to stay in the game for future rounds of investing, as needed. The section of the term sheet that addresses keeping the original investors in the game is called "Pay to Play."
Other clauses that protect investors are ones on antidilution and information rights.
As you go through a term sheet, it's really important to be sure you understand what all these clauses are doing for the investor and for you. That's why you need good attorneys by your side. Institutional investors bring a lot to the table, as they have experience you may lack. On the other hand, remember that they are out to maximize their investment with a clear path to liquidity. That may or may not be your goal. Protect yourself by negotiating intelligently.
If you want to maximize your valuation, do the following:
Business founders may not realize that investors will be looking for milestones to be achieved. That's why investors list milestones in a term sheet. Sometimes, they dole out the funds as the company reaches the milestones. This is called "staged closings." For example, if you have a dot-com, soft launches or hard launches can be milestones. As you negotiate, make sure your milestones are achievable.
Other things to know: Think about what you as a business owner are giving away to the investors. Is it worth it to you?
VCs usually want preferred stock so that their dividends can be accrued and they can get their money out before others. Preferred owners also get veto rights when voting on corporate matters.
VCs usually want to get their money out in 4-5 years. And they want a clear path to liquidity. The term sheets will have details about conversion of preferred to common stock. Remember that investors want to maximize their investment.
Most entrepreneurs think that they can raise capital quickly, but that's not true. VCs need to do background investigations into the company and the owners -- called "due diligence". Then, there's the negotiation of value and dithering over the term sheets. Once you've signed a term sheet, there's still a lag before you get the funds.
Keep in mind that more important than raising funds quickly is to make sure that your investors have deep pockets and will want to stay in the game for future rounds of investing, as needed. The section of the term sheet that addresses keeping the original investors in the game is called "Pay to Play."
Other clauses that protect investors are ones on antidilution and information rights.
As you go through a term sheet, it's really important to be sure you understand what all these clauses are doing for the investor and for you. That's why you need good attorneys by your side. Institutional investors bring a lot to the table, as they have experience you may lack. On the other hand, remember that they are out to maximize their investment with a clear path to liquidity. That may or may not be your goal. Protect yourself by negotiating intelligently.
If you want to maximize your valuation, do the following:
- Have a solid plan, a good revenue stream and solid management.
- Consider a staged closing.
- Establish a stock incentive pool (5-15%) to incentivize employees.
- Consider tax ramifications of all your business decisions. (Get a good accountant.)
Le me know if this has been useful. And please send questions for me to answer.
Thursday, February 7, 2008
Demystifying Term Sheets - Valuation
More from the CVG Jan. 24 meeting:
How do you value a company? Virtually every one of my clients asks me that. The answer given at this Term Sheet Workshop echoed the ones I've heard countless times before, "It's a negotiation." But how do you, the entrepreneur, get the best valuation for your company?
The workshop leaders said that professionally produced financials really help. For later stage companies and companies with revenues, having a CPA help with the developing the best tax structure for the company is also valuable. And while LLCs are becoming more popular, and VCs are beginning to fund LLCs, making your business a C-corporation makes the funding process easier.
For more information on preparing professional financials, visit PriceWaterhouse Cooper at: http://www.pwc.com/extweb/industry.nsf/docid/F3576670492E1BEA85256AC50079E169.
Also understanding the process, including valuations at:
http://www.pwc.com/Extweb/industry.nsf/docid/CF30E217F86F676D85256AB60074EAB7#valuation
How do you value a company? Virtually every one of my clients asks me that. The answer given at this Term Sheet Workshop echoed the ones I've heard countless times before, "It's a negotiation." But how do you, the entrepreneur, get the best valuation for your company?
The workshop leaders said that professionally produced financials really help. For later stage companies and companies with revenues, having a CPA help with the developing the best tax structure for the company is also valuable. And while LLCs are becoming more popular, and VCs are beginning to fund LLCs, making your business a C-corporation makes the funding process easier.
For more information on preparing professional financials, visit PriceWaterhouse Cooper at: http://www.pwc.com/extweb/industry.nsf/docid/F3576670492E1BEA85256AC50079E169.
Also understanding the process, including valuations at:
http://www.pwc.com/Extweb/industry.nsf/docid/CF30E217F86F676D85256AB60074EAB7#valuation
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