When it comes the long awaited moment to take the next step in the growth and attract investors, the first question that arises is: “After all, how much is my business?”. The first fundamental concept that the entrepreneur must understand the value of a company is that valuation before any financial structure is a market perception. It means that there is no accuracy in the calculation because these attitudes may be different, depending on who we are talking about. Analyze financial company requires knowledge of the market and industry, a strategic perspective, and technical attributes. But the results can be variable since there is no definitive way and one calculation. So it is crucial that you have actual knowledge of your business, questioning whether the value that the shareholders and directors sighted considering its risks and opportunities is the same value perceived by the market. After all, who is buying who actually said how much it costs?
What is valuation?
It is the process of estimating the value of a company systematically, using a quantitative model. But even then, it involves some subjectivity doses in the entrepreneur’s judgment to make assumptions and select data sources. Therefore, the reliability of the results depends on the perception of the market and the logic embedded in the entrepreneurial decisions.
If you have a company that is starting, you will have more difficulties in calculating its value, because of the lack of numerical and historical for having a product / service not yet consolidated.
Because it’s important?
Understand the real value of your business allows you to know better, exploring aspects that value and that are worth less. So you can mitigate these deficiencies over time.
Another advantage is that knowing the amount to be invested and the value of your company, you can negotiate the ownership interest of the investor more fairly.
Understand the value of a company historically it allows you to have an idea of the company’s behavior over time, which is key for building future strategies.
How do the valuation of a company?
The valuation of the company can be done by bringing the present value of the results of future cash flows – this is the method most used today, and has three major steps:
1. Estimate the cash flow (amount received less the amount spent) of the company for the coming periods;
2. Set the discount rate, based on the risk of the company according to other investment opportunities, such as the stock exchange or savings;
3. Bring the results to the present value and sum them.
Attention investors consider high discount rates to defend your portfolio against uncertainties typical of startups. Because:
· Investing in startups is hazardous due to the high level of uncertainty and mortality;
· Investors seeking to invest only in startups that have high return potential for the “survivors” more than offset the losses that were not successful;
· Thus, investors consider artificially high discount rates to ensure that each investee startup has the potential to compensate for the loss from other portfolio investments.
Therefore, in calculating the valuation of your company and present it to an investor, you should always keep in mind the arguments for its premises decisions. Understand the value of every aspect of your business can vary from investor to investor, depending on his perception.
Would you like to read more about this topic? This book might interest you: Business Valuation.