‘How Much?’ How to Value Your Business Properly for Investors

You’re convinced that your company has what it takes to be a roaring success. In fact, given how much effort you’re prepared to devote to getting it going, you suspect it will be turning over millions in a few years’ time, right?

It’s great to have high aspirations. Indeed, it’s vital to have lofty goals in order to fill you with the drive to succeed. However, there’s a time and a place to share your ambitious business valuation with the world – and standing in front of your investors is not it.

When it comes to valuing your business for your investors, you’ll need a lot more than a rough estimate of how much you hope to be making in a few years’ time.

You’ll require a number of figures, that when combined, will tell your investor precisely how much your business is worth – both in the future, and right this instant.

Finding Out Your Value

The general wisdom on valuing a business is that you can sell it for 2.5 times the annual revenue.

However, true investors will require more proof than just a single figure.

If you’re not a natural number-cruncher, don’t panic. As long as you know exactly what figures you’ll need to show your investors, you’ll be taken seriously as a genuine investment opportunity.

However, fail to come to your pitch equipped with the right information, and you run the risk of frustrating your investors, which is definitely not the right approach!

Here’s a quick guide, outlining the key figures you’ll need to know to find out the real value of your business:

The Numbers That Comprise Your Real Value

  • This is an area that often causes start-up businesses a headache. If you’re an existing company with a proven track-record of sales, it’s likely that you’ll be able to easily work out how much profit your business is turning over on a yearly basis. If you can show clear evidence of year-on-year growth – even better.

    However, if you’ve only just started your business, it’s unlikely you’ll have much in the way of sales figures. This may not lose you your investment, but it does make valuing your company more difficult. After all, the younger a business is, the greater the uncertainty of its potential to make money.

    In short, without some evidence of earning prowess, you’ll be seen as high risk. The easiest way to resolve this? Start selling as soon as you possibly can. Even showing evidence of moderate growth will help support your case.

  • It goes without saying that you should know your profit margins inside-out. You not only need to know how much direct profit your company makes after each sale, you also need to scale that up to account for growth. If you’ve already been trading for a while, this should be relatively easy. If you’re a start-up, you’ll need to create a realistic projection, perhaps based on other similar companies in operation.

  • Your assets: Investors like to see assets. After all, they’re a concrete symbol of the worth of your business, reassuring them that their investment is at least partially protected. You’ll need to add up the worth of all the assets you have – such as equipment, computers, even office furniture. Your assets also include stock, plus any prototype products you’ve developed.

    Remember that intellectual property also counts as an asset. If you’ve got a patent or a trademark, that’s worth something too, and will need to be acknowledged in your overall valuation.

  • Employees and customers: If you’ve got an employee working with you, they are counted as an asset too, and should be factored into your figures. The same applies for client contracts. If you do regular business with a number of different organisations, each and every single contract has a value. If you are able to demonstrate that you can reliably anticipate receiving further revenue from them in the future, you’ll impress the investors.

  • Value in the market: You may not necessarily need to know exactly how much earning potential your business has in the current market. However, it’s certainly a good idea to have an idea about the size of your target market and how much room there is for your company to grow.

Your investors will be looking at how much competition is out there. If your business has a lot of competitors already established in the market, this will reduce your value. However, if you can demonstrate concrete ways that you’ll be taking business from the competition (such as USPs, great locations etc.), this will help boost the overall value of your company.

The DIY Approach

If you’re trying to value your business yourself, you’ll need to assess the following factors:

  • How much profit do you make from each average sale?

  • How much net profit do you make per year? Or, how much do you realistically think you’ll make per year, based on the performance of comparable companies?

  • What physical assets do you have? How much are they worth? Have any lost value since you bought them? How much equity is tied up in them?

  • Do you have a large client list? If so, what is each client worth to the business? (If there’s a large number, work out an approximate figure based on average orders).

  • What’s the market potential?

  • Do you have any debts or liabilities that might affect your value?

Be warned – working out your value is one of the most difficult aspects of preparing for your investment pitch.

If you’re finding it particularly challenging, remember that you have the option to get in touch with a financial expert, who will be able to help you. Of course, this will cost you money, but it may be worthwhile if it helps you to secure the investment you need.

Mentoring and Advice at the Business Funding Show

If you’re feeling perplexed at the prospect of pitching to investors, book a ticket for the Business Funding Show today.

There’s not only a number of key speakers talking about all things financing and investment related, there’s also a number of mentoring and advice sessions available.

This provides the ideal opportunity to talk through your investment pitch and receive expert advice on how to value your business.

Eventbrite - The Business Funding Show 2016