Blog Author: Reece Soltani, New Sector Fellow
On Tuesday, October 7th Pacific Community Ventures, in partnership with Working Solutions convened three panelists to discuss valuation with small business entrepreneurs in theory, in practice, and in experience. Panelists included Michael Blum, Co-Founder of Granite Valuations, Ariel Jaduszliwer, Vice President of Pacific Community Management (an affiliate of PCV) and Kyle Parsons, Founder of IndoSole.
Merriam-Webster defines “valuation” as, “the act or process of valuing; specifically: the estimated or determined market value of a thing.”
Let us back up for a moment and begin with addressing the elephant in the room. The fact is, valuation is a strategic speculation and a gamble. No one can predict future value and yet, valuing a company is critically important. It draws potential stakeholders, investors, even future employees and consumers; it is essential to intelligent decision making.
So how does one effectively capture a company’s value? Isn’t a valuation fraught with bias and subjectivity? What qualifies as an asset to be valued? And at the end of the day, isn’t the real number just what you end up selling your company for anyway? Tuesday’s event was a platform to address all of these questions. Here are some Key Takeaways:
- Don’t get emotional. This is a difficult maxim to embrace if your business is your baby. With years of work, life savings on the line and a drop of all other priorities to ensure the business’s success it can be especially difficult to detach. But hope and fervor are not measured. It is important to remember, you are not your business nor is it a quantifiable value of you. Figure out a way to vet that process. The truest valuation of your company will depend on your ability to be realistic.
- Seek Apprenticeship. Strong management is the backbone of any successful company. Seek the advice of those who’ve proven successful at this. Organizations like PCV are here to get you there. Our Business Advising program connects entrepreneurs like you with the valuable resources you need to run and grow your business successfully, free of charge. PCV connects you with expert business advisors and other key resources to keep your business thriving, maintaining jobs and creating new ones in your voyage to expansion.
- Find “Comparables”. While this is a useful assessment tool, keep in mind it’s not terribly accurate. It is extremely difficult to look at other publicly traded companies similar to yours and assume their valuations must also be one in the same. None the less, it is worthwhile to understand how the market looks at similar companies. Just don’t let turn into the “end all, be all” for how you value your company. Think of this tool as the Wikipedia of your research, just a place to start.
- It’s what you put into it. When all else fails, assume the valuation of your company is at least the amount you’ve put into it. Again, this method is not accurate. Just because you’ve input $1 million into a start-up, does not mean investors will assign it at the same value. It is a very subjective process, and there is no concrete value until you receive a realistic offer you are willing to sell at.
- Employ the Discounted Cash Flow Model. Used prolifically amongst corporations, investment banks, and consulting agencies alike, the Discounted Cash Flow (DCF) Model is the most trusted and powerful instrument to reach an unbiased valuation. The Stern School of Business describes the DCF method as a simple proposition, “estimate the value of an asset as the present value of the expected cash flows on it.” Even so, any valuation with or without employing DCF is only an estimate; there are biases, inaccuracies in calculation and unpredictable scenarios that can and likely will affect your company’s value.
The discourse around valuation methods remains fractious with some saying “value is in the eye of the beholder.” Generally speaking, human beings are not rational; they make purchases based on sentiment, sometimes creating artificially high valuations, but then turn around making other purchases solely on the basis of financial return. I’d say the trick to effective valuation lies somewhere in the middle; the question is how to balance sentiment versus fiscal motivations.
Moral of the story: valuation is only a forecast and the weather can always change, yet you still trust that weekly prediction to know whether or not to grab the umbrella.