As entrepreneurs, we don’t usually confront ourselves with finance too much. At least, we are inclined to think like that. Accounting and numbers are left to the hands of professionals, and not only for legal compliance but also to get rid of them. Nevertheless, for us, entrepreneurs, knowing and learning how to deal with financial spreadsheets, operation projections and cash flows becomes a necessity on several cases. 

One of such occasions is when the valuation of the enterprise needs to be estimated. Financial professionals will offer guidance and support, but that comes at a price and it will never take away the entrepreneur’s effort in contributing data. The question which now pops up is:

Negotiate better with investors 

An equity financing round is a good example and for startups valuation might be needed several times in the first years of activity. Knowing how to get to an reasonable estimate puts an entrepreneur into a much better negotiation position, especially when dealing with investors acquainted with that. According to the research by the Kauffman foundation, after the initial interest of investors, more than 50% of deals fail on valuation issues”. Such a failure is likely to be attributed to the discrepancy in knowledge between the two parties: entrepreneurs have usually fewer experience and may lack the background to explain their valuation claims.

Be safe in case of exit

For startups, company valuation also plays a big role at the time of exit– that is, when the stockholders wish to trade the stocks in and realize their Return on Investment (ROI). This is the moment all the stockholders have been waiting for so long: as a founder you, of course, don’t want to be left out of the decision table!

Inform your stakeholders

Not only stockholders want a regular update about the value of our business. Employees, advisors or board directors with performance-related compensations (e.g. stock options) can become a major and pressing stakeholder as they need to be regularly informed about the performance of the company and its influence on the enterprise value.

Do valuation for other purposes

However, the need for valuation is not only restricted to financing rounds and startups. Whenever a merger, an acquisition or a transfer of shares takes place,  the stocks object of the transactions are required to be priced at “market” or “fair” value according to the international  accounting standards (see IFRS 13 about fair value measurement) as well as the majority of local accounting legislations.  It’s also in the interest of the parties involved to get to a good estimate of the transfer price which reflects the present condition of the asset.

If you are surprised about the extent valuation can influence your business, then you’ll definitely want to know more about this topic. Check out our next post in which we go deeper into startup valuation practices, outlining what is the approach most successful business angels follow when assessing startup value.  It’s never too late to get acquainted with valuation issues. No time to learn? Get started with Equidam and find out what your business is worth!