How do you determine your business's value for investor negotiations?

Determining your business's value for investor negotiations is a crucial step in raising capital, selling your company, or forming strategic partnerships. However, there is no one-size-fits-all formula for valuing a business, and different investors may have different expectations and preferences. In this article, you will learn some of the common methods and factors that affect your business valuation, and how to use them to your advantage in negotiating with potential investors.

Key takeaways from this article

Compare with industry peers:

Look at similar businesses in your industry that have recently sold or attracted investment. Use their revenue multiples as a benchmark for estimating your own business's value.### *Project future income:Estimate your business's future cash flow and discount it to present value. This method helps investors understand potential returns and associated risks, making your valuation more convincing.

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1 Method 1: Market-based

One way to estimate your business's value is to compare it with similar businesses in your industry or niche that have been sold or invested in recently. This method relies on finding comparable transactions or deals, and applying a multiple or ratio to your business's revenue, earnings, or other metrics. For example, if a similar business was sold for 5 times its annual revenue, you could use that as a benchmark for your own valuation. However, this method has some limitations, such as the availability and accuracy of data, the differences in business models and growth potential, and the influence of market conditions and trends.

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Colin King, CPA, CFA

Investor and Entrepreneur; building businesses and helping operators
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Need to use a wide range of transactions (sample size) and remove outliers. Also consider various economic periods or use time-based median multiples to remove cyclicality or economic events.

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2 Method 2: Income-based

Another way to estimate your business's value is to project its future income or cash flow, and discount it to its present value. This method reflects the investor's expected return on their investment, and the risk and uncertainty involved. There are different ways to calculate the income or cash flow, such as using historical averages, growth rates, or projections based on your business plan. You also need to choose an appropriate discount rate, which is the interest rate that the investor would require to invest in your business. The higher the discount rate, the lower the present value of your future income or cash flow.

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Colin King, CPA, CFA

Investor and Entrepreneur; building businesses and helping operators
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Scenario playing is key. Seller wants highest multiple and highest metric for that multiple. Opposite is true for buyer. Each party should work out a “normal” valuation metric and apply a range of reasonable multiples. Valuation is a spectrum and not finite.

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3 Method 3: Asset-based

A third way to estimate your business's value is to add up the value of all its assets and subtract the value of all its liabilities. This method gives you the book value or net worth of your business, which represents the amount of money that you would have left if you sold all your assets and paid off all your debts. However, this method may not capture the true value of your business, as it does not account for intangible assets such as goodwill, brand, or intellectual property, or the potential growth and profitability of your business.

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4 Factors to consider

No matter which method you use for valuing your business, there are other factors that can influence how investors perceive and value it. These include having a competitive advantage and market position, growth prospects and scalability, customer loyalty and retention, an effective team and culture, and legal and regulatory compliance. Additionally, you should consider the costs and challenges associated with expanding your revenue, customer base, and market reach. Moreover, the satisfaction of your customers and their likelihood to repeat purchases or refer others will also affect your valuation. Finally, you need to ensure that you are following all the laws and regulations that apply to your industry and operations to avoid potential liabilities or penalties.

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Mayowa Badmus

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Several factors need to be considered before you can determine the net worth/ value of your business for investors negotiation. Among them are: 1. Number of years that the business has been operating. 2. Goodwill 3. The possibility of future growth and expansion. 4. The uniqueness of the products/ services being provided. 5. Current value of a similar business in the same industry. 6. The human capital resources of the company. 7. The assets and liabilities 8. Performances over the years. 9. Future performance projections. 10. Volume of turnover and revenue. The list is endless, but these ten factors will give you a proper insight as to what price/ value to put on your business for a prospective buyer/investor for negotiation.

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5 Negotiation tips

Once you have an estimate of your business's value, you can use it as a starting point for negotiating with potential investors. However, you should also be prepared to adjust your expectations and terms based on the feedback and counteroffers that you receive. To ensure a successful negotiation, it is important to do your homework and research the investor's background, interests, and goals. You should also be flexible and creative in considering different types of deals, such as equity, debt, or hybrid, and different valuation methods. Additionally, it is important to be realistic and honest about your business's value, performance, or potential. Provide evidence and data to support your claims and don't be afraid to admit any weaknesses or gaps. By taking these steps, you can create win-win scenarios that satisfy both parties' needs and interests.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you determine your business's value for investor negotiations?

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1 Method 1: Market-based

2 Method 2: Income-based

3 Method 3: Asset-based

4 Factors to consider

5 Negotiation tips

6 Here’s what else to consider

Financial Management

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