Valuing a company is an essential step in a business’ capital raise preparations. Not only does it dictate the worth of the business and define the terms of investment, but it also puts a value on how much incoming investors will own as a percentage of your overall business.
If you are considering raising capital for your business or selling it, then it’s important to do a company valuation and have a view of the best way to understand your company’s worth.
Businesses will usually value their company using several techniques to see if there is a common valuation range between them all, with the process often being an art much as a science. Below we have outlined a few of the most common private company valuation options.
The Market and Transaction Comparables valuation approach works by identifying several similar, listed and private companies, before looking at what their valuation is and applying a similar range to your own company.
When following this valuation method, it’s important to select companies that are:
If you’re comparing your company to a listed comparable, It’s also important to consider liquidity, as listed companies shares can be bought and sold on the stock exchange. Therefore, investors will discount a capital raise company’s valuation, as their shares aren’t as easily tradable.
When comparing your business against another company, it’s essential to be aware of the current economic climate. If you are valuing your company and raising capital during a recession, then this isn’t comparable to a company that has a pre-valuation calculated during a buoyant market.
The Discounted Cash Flow (DFC) valuation method determines the value of a company based on its future cash flows. This method uses a discounted cash rate to calculate the company’s discounted cash flow and then ascertains if the discounted cash rate is above the current company cash flow.
The DCF method works best on mature companies where cash flow is reasonably easy to forecast. It doesn’t work as well for start-up or high growth companies.
It’s important to keep in mind that this valuation method can be flawed as future cash flow forecasts can prove inaccurate as they don’t take into account changes in the market.
If a company is mature and holds a lot of assets, such as real estate or expensive equipment, the asset-based liquidation value method can work well. This valuation method works by looking at the net value of the company’s physical assets if the company was to go into liquidation and the assets sold.
While a liquidation value is worth more than a salvage company value, it is usually worth less than a company’s book value. The salvage value is the estimated resale value of an asset at the end of its life, while the book value of a company is the value of its assets listed on the balance sheet at their historic cost, which could be higher or lower than their market value.
While Snowball Effect does not provide legal or financial advice on a company’s valuation, we do have a third-party panel of experts who can be called on to assist. This panel is made up of financial advisors, corporate finance professionals and experienced investors, who are able to provide companies with feedback, benchmarking and advice on company valuation.
Once a company valuation has been settled on, we recommend companies include details on their valuation process in their capital raise Information Memorandum, as well as financial evidence to back up their appraisal.
It’s important for investors to be informed of a company’s valuation for several reasons:
Investors will commonly be able to find out more information on how the company arrived at their valuation in the capital raise Information Memorandum.