What is the value of my business?

what is the value of my busnessWhen we think about “what is the value of my business” one of the most common mistakes we will see with entrepreneurs is in valuing their business when it comes to raising capital.

In our enterprise we have had the opportunity to analyse more than a few hundred businesses annually. There is some commonality to the errors that we see but largely it revolves around the perceived value of the business as compared to the real value of the business as seen from the eyes of the investor.

In one phone call I remember chatting with the principal of a tech company in the beacon streaming sector. He proudly walked me through his business plan and asked if I had any questions? As a matter of fact I did. I wondered where he derived his assessment of his company’s value? He had pegged it at $5MM. It was a very interesting number I recall suggesting, in fact it is a very round number!! What happened next is pretty typical – he defended his price with no facts or science at all. Simply that he knew his company was worth that. He perhaps would have been better served to ask someone “what is the value of my business” who had some qualifications.

My next line of questioning was in regard to what his company had achieved. The answer was that he had a good idea. He had not made any sales, but like every company he was about to. So in reality his company was worth nothing or at least almost nothing. He had a good idea and he had spent some other peoples money developing a good idea but he had not proven it in the market.

The biggest mistake we see is overvaluing your company very early in your genesis. It means that the shareholders you may be fortunate enough to bring to the table have no room to grow their investment without substantial leaps in development of the company. The problem is then compounded because the first shareholders in are usually the worst offenders because they want to see growth in their value and so they arbitrarily increase the value of the company’s stock. I get it, it is human nature, but it also spells the demise of the company’s ability to attract capital to be able to operate and reach strategic milestones that add real value.

Back to the conversation. I pressed the entrepreneur on where the valuation came from and finally he suggested a very well respected friend told him his company was worth that much. It was all I needed to hear. I indicated I was not interested on the basis that the valuation was so far off base. Of course the entrepreneur defended his position and argued he would find the money and we said our good bye’s.

Imagine my surprise the next day when I received a call from the same gentleman. He thanked me for my input on the previous day and suggested that he had thought about his valuation and decided his company was today worth $2.5MM. I explained again that $2.5MM was also a very round number and interestingly it was exactly half of yesterdays value. Did he have a reason why? Of course it was as much a farcical number as the previous day’s and showed a serious lack of business intellect on behalf of the owner.

 

So What Is The Value Of My Business?

Sadly this process repeats itself far too many times. The lesson might be to figure our what your business is truly worth today (with some consideration given to opportunity) not what it might be worth tomorrow – that is tomorrow’s value.

So if you are wondering “what is the value of my business”Consider talking to many people, including private lenders and people in the same industry to get a benchmark price. What we do know is the metric for value is and always has been the price at which a willing seller will sell to the willing buyer who will buy. It is pretty simple really.

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