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Business Owners

The 2 Most Important Drivers Of Your Company’s Valuation


Open up any corporate finance textbook and you’ll find thousands of pages devoted to valuation theory, valuation principles, and techniques for arriving at a rational and dispassionate value for your company.

No matter how sound the valuation theories are, companies are valued in the real world, by real people with varied motives, amidst a dynamic market and uncertain future that no one can perfectly predict. And so entrepreneurs must focus on driving their company’s valuation by building the best business they can build, engaging with real-world investors and potential buyers, and painting a picture of their company’s future that is both expansive and credible.

By the time you’ve decided to actively sell your business or raise a round of financing, you’ve got to put building the business on hold and devote your attention fully to the capital raising process. At this point in time, the two most important drivers of your company’s valuation will be:

  1. its future
  2. competition among investors

Let’s address these one by one.

The Future

Investors only care about the future of your company. When an investor studies your company’s historical track record, reviews your financials, or interviews your customers, they are doing it to look for clues about the future prospects of your company. The quality and credibility of the picture you paint of your company’s future — the size of your market opportunity, the speed and predictability with which you can serve your customer base, and the defensibility of your product offering — is the most important driver of your company’s value.

In an uncertain world, the more predictable and sustainable your company’s future profits are, the more valuable it becomes to investors, who constantly assess the risks and rewards of an investment opportunity.

Many entrepreneurs get mired in the details of valuation or put their head in the sand and simply pick a number based on their personal needs or what they heard was “right for their industry”. This is wasted time.

Competition among Buyers

A credible and compelling future makes it easier to attract investors. And if you’re raising money or selling your company, competition is a must-have. You will not dependably realize a fair value (let alone maximize your offer) for your business without multiple uniquely interested and credible parties at the table. It doesn’t matter if your business has been growing at 100% top-line with 50% EBIT margins for 10 years straight — if you only have one interested party at the table, you have created no competition for your business and will struggle to achieve a fair outcome. For entrepreneurs more familiar with selling to customers than with raising capital or selling their company, think about your sales process: the richer your pipeline of customer prospects is, the more choosy you can be about which prospects you focus on closing, and the more disciplined you can be in negotiating the pricing and terms of the customer contract. The exact same concept applies to raising money or selling your company.

Creating competition in a financing or exit process is one of the most important reasons the investment banking profession exists — similar to a good real estate agent, a great investment banker helps business owners drive to a fair outcome by attract multiple, interested parties that are acutely and uniquely motivated to buy or finance your business.

As you prepare to raise money or sell your company, ignore all of the noisy free advice you’ll get and focus on two things: how to crisply and credibly articulate the future of your business in the most predictable and expansive way possible, and devoting meaningful time to doing the necessary networking and relationship development (meeting with investors before you formally initiate a process, meeting investment bankers who can help you) in advance so you can attract a set of uniquely and acutely interested partners to the table.

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