How much is your company or start-up worth? More importantly, how much could it be worth in the future? And therefore what’s the right equity stake for potential investors?
Krogger’s team of professionals addresses these and other valuation questions, so our clients are always focused on creating maximum returns for themselves and their investors
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Valuation is one of the most neglected angles of business formation. The topic typically only becomes relevant when the company has been operating for some time and for one reason or another is put up for sale. The pressure from potential buyers compels the business owners to spend time and resources understanding the fair value of their company at the very last minute, at which point they cannot do anything to increase it and fall victims of tough price negotiations.
This shouldn’t be the case. An early understanding of the value of a business, project or asset is of paramount importance as not only provides vital information on what returns can the owners demand – it also captures insights into value potential and critically into what needs to be done to maximise it. Business valuation is indeed a process that needs to be constantly managed.
Valuation for Start-Ups
Asserting that valuation exercises are only relevant to established businesses or that are not meaningful in the case of start-ups is a blatant misconception. Those entrepreneurs that spend time determining the potential value of their businesses and its parameters, are less likely to leave money on the table when raising capital and are able to better focus their actions to create value for all shareholders (including themselves).
On the other hand, assuming that a soon-to-exist company is worth zero because is just an idea and therefore its potential value solely depends on whatever the first investor puts in is, at the very least, an oversimplification and clearly fails to grasp the process of value creation that the entrepreneur will embark on.
In this sense, establishing the value of a start-up is critical for the capital raising process and the on-going operation of the company. Specifically, having a professional valuation done, helps by:
Maximising the value for entrepreneurs raising finance – If you know what’s the potential value of your company, you are better prepared to negotiate with investors and give away a fair share of your company in exchange for their money.
Strengthening your profile as entrepreneur – Knowing in what value range your company is and negotiating on that basis, signals potential investors that you are prepared, have adequate judgment and are focused on shareholder value.
Providing a framework to establish control of the company early in the game - Valuation, equity percentage and the use of proceeds (i.e. what you need the money for) are interlinked. Start with a valuation that is too low and you might end-up giving control of your company for not enough money. Price your company too high and you might not get the money at all or be forced to dilute your stake down the road when cash has run out.
Determining the strategy for further financing rounds – If the valuation of your start-up is too low today, you could probably entice your first investor to participate; but as there will be less equity to give away in the future, your ability to attract new investors would be severely impaired, in case you need more cash.
Valuation for Small and Established Businesses
Most businesses tend to use valuation services in the context of an imminent transaction, such as a sale of the company or a potential acquisition. Clearly, preparing a professional business valuation analysis is a pre-requisite. However, valuation exercises are also very valuable in a wide array of situations. These include:
Valuing the impact of a new potential project to decide whether to go ahead or not.
Valuing the company to decide how many options or shares to give to employees as part of a compensation programme.
Valuing the business for an alternative liquidity event (e.g. IPO, LBO, MBO, JV, merger, etc.).
Fairness opinion on the value of the company to inform shareholders whether a bid is appropriate or not.
Valuing the company to bring new investors in if required.
Valuing the division of a company to decide if it should be sold or kept within the group.
Valuing the stake of the founders that are looking to exit the business independently, including a potential sale to other shareholders.
Be it for start-ups or established businesses, a business valuation brings clarity to the link between performance and value; between where the company is today and where it could be tomorrow; and finally, using the right framework, between the day to day actions taken by entrepreneurs and managers and the value they will harvest in the future.
At Krogger, we address our clients’ needs to understand and manage the value of their businesses. Our valuation practice combines the best of our financial analysis capabilities with industry-specific knowledge and our practical philosophy, to help clients determine the value of what they do, and above all, to guide them through the sometimes elusive process of sustained value creation.
Our valuation services focus on 2 areas:
Value Assessment – Krogger brings together the rigour of leading corporate finance theory and the reality of market practices to determine the value of our clients’ businesses under different scenarios
Krogger’s valuation services have a strong foundation derived from the rigour of academic corporate finance, but we use this in tandem with clear, simple and practical techniques that reflect the singularity of our clients’ businesses and the reality of the markets where they operate.
We are different. When compared to other alternatives, our valuation services are:
In-depth – In stark contrast with some other providers of valuation services, Krogger develops detailed and comprehensive value analyses that offer our clients a unique vantage point on the true value of their companies.
Most other providers tend to focus on one single methodology to value your company and some even offer remote valuation services, without them knowing anything about you, your company or your plans. Using these services might lead to a dangerous path where entrepreneurs and business managers rely on incomplete, unsound and sometimes just plain wrong value indicators.
At Krogger, we derive the value of your company by triangulating all fundamental valuation methods, adjusted for the specifics of your company, industry and macroeconomic environment. We can only provide this service after understanding your business and your plans. There is no shortcut.
Practical – We know corporate finance inside out and our methods are theoretically very sound; however, we don’t stop there. While other advisors inundate you with technical jargon and complicated models that are only true on paper, we work hard to translate our value assessments into something you can understand and use.
More importantly, we understand that value is not an absolute concept and therefore we incorporate relative valuation techniques that reflect the reality of current markets, investors and buyers. Value is something that changes and is subject to the appreciation of the different parties involved in assessing your company. We, at Krogger, have the capabilities to navigate this practical reality.
Dynamically Integrated – Practically all valuation materials we have seen from other advisors are static snapshots of the current value of the company. They seldom allow for the flexibility to see what happens to the value of your company if you cut costs, increase revenues or add more people for example.
Krogger’s valuations can be fully integrated with your financials or even with your full business plan if we prepared it for you. Knowing what is the value of your company is only half of the equation – having full insight on the drivers behind this value and how to modify them is the other.
Independent – We are free from the conflicts that other valuation providers have. Unlike some of them, we are not in the business or buying and selling companies, which might create the incentive to push your valuation down (if they have an interested buyer lined up) or unrealistically high (if they want you to hire them as sellers of your company). At Krogger, we focus exclusively on providing you with unbiased and objective advice when valuing your company.
Strictly Confidential – Be wary of free valuation services. You never know where your confidential information might end up or in which way it could be used. At Krogger, we are guided by extreme confidentiality and discretion principles. Every engagement we work on is governed by a robust non-disclosure agreement to protect your information, your ideas and your company.