K.White book

Innovation for Business: a 21st Century Development Model for Russia

Part XIV

Key tools to determine your value

There are different methodologies that could be used to determine the valuation of a company. Theres a recent price of an investment, which is company valuation based upon what a previous investor invested into your company. Lets say someone invested $100k and bought 10% of your company, which means your company may be worth $1m. So, in this case an investor looks at the past valuation markers.

You can use net asset calculations using transparent accounting data, or a cash flow methodology looking at your future prognosis and using discount factors.

You can look at industry valuation benchmarks, for example, sales multiples, EBIT multiples or EBITDA multiples. In any publicly traded companies you can analyze what their valuation base is using those multiples. Im going to describe further on a specific example where multipliers were used to determine valuation.

Any sophisticated investor is going to assess the valuation based on each of these factors to come up with an average valuation. He will look at publicly traded companies, small-cap companies; he will take a look at your particular political and economic environment. He will see what a U.S. company is valued in a similar environment; what the valuation is of a similar Chinese company, Latin American company, Western or Eastern European company, and so on. So the good investor is going to analyze the value of your company from many, many angles, using many different methodologies and benchmarks.

The lowest, the highest, and the erroneous

And then he will have his idea of a range in which your company may be valued; a minimum value and a maximum value. The minimum value is absolutely critical; an investor wants to pay as little as possible and buy as many shares as possible. But any sophisticated investor understands that you as the owner want to sell the firm at its highest valuation. So this is a matter of negotiation.

As this process goes, you need to have in your mind your valuation range. If your minimum valuation is $50m and at the same time an investor comes and feels that your company is only worth $10m, then the gap between your minimum estimation and his estimation is too great, and its not worth wasting time to discuss this.

But if you talk to several investors and each of them comes through with a non-binding preliminary valuation which is significantly below your minimum assessment, then you have to reassess your range because it may be incorrect.

29 Nov '10

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