As an entrepreneur, your business is your baby. You’ve put in countless hours, made numerous sacrifices, and taken risks to bring your vision to life. When it comes time to exit your business, the value you receive will determine the compensation for all the time, money, and personal financial risks you’ve taken. This is one of the biggest defining moments in the journey of entrepreneurship, and it’s essential to value your time and talent and compensate yourself and your family for all the risks and sacrifices along the way.
The question that arises is, how do you value your company? Is your answer a mathematical equation? Is it addressing any items that create value? If you answered the question “How do you value your company?” with something like a multiple of EBITDA, revenue, or customers, this article is for you!
While academics and finance professionals attempt to make valuation objective, the reality is that valuation is subjective. Knowing why and how experts and professionals use objective valuation tactics will arm you with an advantage to get what you want—a Breakout Valuation.
Over the years, we have come to appreciate that valuation is a present view of what the company will produce in the future. Contrast this with most private market investors who want to value a business based on what it is producing today. Academically, investments, such as stocks traded in public markets, are based on the net present value of future earnings expectations. The challenge with the academic view of valuation is that it is based on a forecast of cash flows, which has a major drawback: no one has an accurate forecast, so all we have are expectations based on the biased viewpoints of the forecaster.
Valuation is more important to you than to anyone else in and around your business. While you may have other shareholders, as the founding shareholder, you have the most to gain or lose from outsiders pegging a value to your business. Valuation is what your business is worth—and what it is worth is in the eye of the beholder. Valuation is the economic value (primarily cash) that will change hands when and if ownership of the assets and all the rights of the business are sold.
Knowing what your ownership of the business is worth becomes increasingly important as the business matures. Understanding value may allow owners to pledge their ownership as collateral for loans, and it helps them make important financial planning decisions that impact their families and future generations.
Valuable businesses can also accomplish something magical: they make it easier for founders to transform from employees into owners—meaning founders can retire from working day to day in their businesses and transition to being strictly owners. Additionally, valuable businesses have an easier time attracting and retaining employees, customers, and strategic relationships. People want to work with companies that are seen as valuable and have bright futures. A valuable business becomes a magnet attracting top talent, quality customers, and superior vendor relationships, and it provides its owners freedom.
It’s time to turn the tables and put you in the driver’s seat to maximize your odds of getting a Breakout Valuation. You don’t need to be a valuation expert; you only need the context of what makes your business valuable to articulate the value drivers to other parties.
Valuation is simple. It is the present view of what the company is capable of producing in the future. It is up to you to have a vision—a forecast of what the company is capable of achieving. Valuation is the net present value of the future cash flows you expect to receive. While it’s important to look at current performance, it’s equally important to evaluate future growth opportunities and create a compelling story around them.
Valuation is subjective, but it’s essential to understand what your business is worth.
What are your views on the importance of owning a valuable business?Share your thoughts in the comments or ping me directly at: patrick (at) hillcapitalcorp (dot) com.