Business Valuation

Fundraising for equity finance

Business valuation is a fundamental part of the fundraising process. The value of a business is essentially the value of its future profits, converted into a ‘present value’. The anticipated future profits are ‘discounted’ at a percentage rate which reflects the willingness of the buyer to wait for the payments, and an assessment of the dependability of those payments being made. Given that these are subjective assessments, valuation of businesses is both an art and a science. Businesses need to have a firm view on their value and present this within their Business Plan, but at the same time be prepared to negotiate with equity investors if they are to close a deal.

The more mature the business, the more reliable its historical financial statements will be as a guide to its future performance, and the more objective the valuation. Conversely, valuing earlier-stage businesses inevitably involves a greater element of judgement. This judgement is primarily about the quality of its management and market prospects.

A general characterisation of businesses within certain value ranges is given below.

Valuation: £250-500k	Good quality intellectual property (IP), in both patent and know-how form A credible technologist, with top-notch academic and industrial track record Management on board or ready to engage Market clearly identified, if not yet validated	Summary: A promising technology with a plausible plan but no market proof
Valuation: £500k - £1m	IP portfolio extends to a 'family' of related patents Technical team no longer dependent on a single person No major gaps in the executive management team and well-connected non-executive board team At least one customer committing economic resource to the endeavour	Summary: A promising business with a credible plan and some proof of market
Valuation: £1-3m	Company has the capacity for ongoing IP development and renewal Management team credible to lead business through to flotation/sale Repeated revenues from at least 3 (preferably blue-chip) customers Validated business model showing defendable profitability and scalability	Summary: A proven business concept in the hands of a proven team
Valuation: £3-5m	Sales revenues consistently funding a significant part of operating expenditures Clear and credible plan to expand business into further products/markets Exit strategy clearly defined	Summary: An established growth business moving aggressively into new markets
Valuation: £5m+	Revenues around the £1m p.a. level Business can reasonably be valued using financial methods (such as multiples of EBITDA) Specific plan for exit in short to medium term	Summary: An established company with track record of successful growth in new markets