The process of valuing a business is quite complex, not to mention the difficulty of reaching a good valuation in itself. Regardless of which method you use, a good business valuation plays an important role in your road to entrepreneurial success.
Overestimate the value of your business will make it more difficult to get investors on board. Though it might be tempting to overvalue the business, all you really do is create an illusion based on your own cognitive bias, and that’s exactly what you don’t want to do.
If your business valuation is ridiculously optimistic, you will only scare away potential investors because it can show a lack of business acumen.
What is a ‘Good’ Business Valuation?
So what does ‘good’ really mean when we refer to business valuations? We at BizValue, Ltd. believe that a good business valuation is an accurate and realistic one. It’s based on an honest and objective look at your business’ weaknesses and strengths.
But a good business valuation is more than that…
A good business valuation is an asset during your negotiations with investors or external party because you can use it to show exactly what makes your business valuable and worth investing in.
We’ll give you our top 10 tips to make sure you have a good business valuation.
The 10 Characteristics of a Good Business Valuation
- It should be realistic
Valuation is based on projected financials and growth. To understand what is realistic you should try to find companies similar to yours in stage, revenue and industry and use their valuation as a benchmark.
- It should be based on achievable growth rates
When estimating your financial growth numbers it is always best to ensure that your financial projections are actually achievable. By doing so you are more likely to achieve your goals on a regular basis which solidifies trust in your investors.
- It should be based on truthfulness
It might be tempting to play around with the numbers and ignore weaknesses your business has. Don’t do it! Though the valuation overall might be higher, potential investors will be able to spot your leaps in logic and might decide not to invest as a result.
- It should take into account intangible assets
Especially if your business is pre-revenues, you need to make sure that you value intangible assets to reach a proper valuation. That means you look at things like the strength of your team but also market potential, proprietary or intellectual property rights.
- It should be compared to similar companies
Relative valuation is essential when you try to value your business. the worth of your business is only as good as those of comparable companies. Thus, if similar businesses were valued around 1 million, your valuation of 10 million might not make a lot of sense.
- It should be based on qualitative & quantitative elements
Ideally, a business valuation is based on both financial projections and growth rates as well as intangible assets. By excluding any one of these elements you might be missing out on value.
- It should be relevant for the stage of development your company is in
If your business has already been proven to work in the marketplace, uncertainty and risk is significantly reduced for potential investors. On the other hand, if you are in the early stages of product development, the increased risk and uncertainty should be accounted for in your valuation.
- It should look at the industry your company is active in
Every industry has it’s own characteristics. Some are hot, some are not. Some have high degrees of uncertainty, others don’t. Some might be pretty saturated, whereas others aren’t. Either way, an accurate business valuation looks at the dynamics of the industry it wishes to be a part of.
- It should be honest about the strengths of the product (or service)
If you developed a high tech product and are the owner of IP you show potential investors that your product is good and worth protecting. It could also be that your product or service might not be that amazing, but the overall business model is, which is where your competitive advantage lies. Being honest about the strength of the product is key in each scenario nonetheless.
- It should look at the strengths of your team
Potential investors tend to be more inclined to invest if your team is strong and has some sort of track record. Perhaps you have experience as an entrepreneur. Maybe your team has authority and experience in the field. Whatever it is, never discount the strength of your team.