So How Much is My Company Worth?

One of the commonest questions asked by entrepreneurs is that given in the title of this post. "I've done the hard work. My house is mortgaged and re-mortgaged. My marriage and family were nearly sacrificed to set up the company. Now I want to turn that effort into cash. How much can I get for it?"

Firstly, there are a few unfortunate truths that need to be laid out. Regardless of the exit route chosen, here are the amounts you will get for some of your inputs:

Putting your house at risk: £zero
Sacrificing your family life: £zero
Sacrificing your health: £zero

If you have any comments in your presentation or pitch documents about any of the above, take them out. Other than confirmation that you have been committed to the business, there is no "extra credit" for your endeavours. Sorry.

So what can you get credit for? And how much is my business worth?

Well, a brief search on the internet will reveal many, many equations, spreadsheets and analysis charts that can come up with a "fair value." I will leave this search to you. However, this obscures one basic truth. Your business is worth what someone will pay for it. How much they will pay for it is judged on its future, and their belief in its capability to deliver that future, and not on its past.

Commercial Catalyst's work established that, regardless of the various spreadsheets, a stable, profitable lifestyle business might expect a price of about seven times profit from a private buyer, subject to no nasty surprises on the balance sheet of course.

However, if there is a believable, credible forecast of sales growth, then sale to a competitor, or a firm looking to move into an adjacent market, might bring five times turnover.

The big payout is if there is a game changing innovation, and there is a cash rich incumbent in the market. This is when we move into "bubble" territory, and valuations could reach twenty times turnover - as long as the incumbent is willing to pay!

There is one further factor in the equation; technical believability. Can the company deliver on the sales promise, especially if it requires development of new products based on the technology or engineering expertise held? This is when it is vital to ensure that the development process and planning is clearly laid out, so that there is the credibility behind the figures presented for investment needed, and the resultant return. This credibility is the difference between the seven times profit and twenty times turnover figure. (And by happy coincidence, it is what Fintelis does!)

In short, maximising sales value depends on a realistic forecast of profitable sales growth, and the technical credibility behind it.

Dragons? What are they good for? Absolutely everything!

What makes you grind your teeth most in "Dragon's Den"? Is it Peter Jones's socks? Is it the dragons' universal misunderstanding of the patent system? For me it is the constant use of the phrase "he had to give away X% of his company."

The truth is equity for a private company should be regarded as part of a deal; it's a tie-in to ensure that all the stakeholders have an interest in the company increasing in value. This leads to an interesting corollary; the only people with a share of the equity should be those contributing to growth in value. "Selling" equity (and I like that word as little as I like "giving" in this context) is an expensive way of raising money. In terms of the value at a typical "exit", venture capital is twelve times more expensive than funding from profit. (Thanks to Commercial Catalyst for their work in establishing that figure.) In other words, any investor should be bringing much, much more than money to the table, or they're poor value. They need to have expertise, experience and contacts that can all be used to increase the worth of the business they've bought into.

This is why the dragons on "Dragon's Den" can lend such help to companies in the fields of office supplies, hospitality, recruitment, retail and leisure businesses - but are all less at home in areas of innovative engineering, especially in business to business applications. The dragons simply don't have experience in that area, and realise it; there is no point in them just "buying" equity, and assuming that the value will increase without them having to help. If such passive investment was all that was required, there are cheaper sources of funding.

Effective investors will only invest in early stage companies if they can themselves improve the odds of that company succeeding. Money alone is not enough.

So the equity the dragons have in the company has not been given, or even sold to them; it is a line to bind them to the enterprise, and ensure they have a vested interest in helping it succeed.

"Free" Money for Bright Ideas

Everyone knows that these are difficult times for both established and start-up businesses, especially in the engineering sector. What people may be less aware of is that there is still money available to fund bright ideas, if you are prepared to go through the system to get it.

For example, say you have a potentially lucrative invention, but no money to test whether it really works. You're stuck, right? Wrong. Most West Midlands universities run an Innovation Voucher scheme, where they will carry out work up to a value of £3000, and you contribute absolutely nothing. There are certain restrictions; you must be an SME (less than 250, less than £50M turnover) and there are preferred industries (medical, energy, materials, digital media, transport) but the interpretation is quite broad. And yes, even individuals can access it.

This is just the first step of an "innovation escalator" that can lead to grants of up to £30,000, to bring technologies and products to the market, although in this case there must be a 25% contribution from the company. In other words, three quarters of the costs will be paid for!

But what if the expertise in your field is abroad? Well, the UK government, through UK Trade & Investment will help you access it, even identifying partners, locations and helping with travel costs.

These aren't loans. They're grants. No interest payments. No "dragons" owning your equity. No downside, other than the applications to get them - and there are actually helpful people to walk you through that.

That's just two examples of the help that's out there. The information about it can be tricky to get hold of; Fintelis is willing to point people in the right direction to access it. This is a free service, because we believe that successful companies will return to us as customers.

So what's holding back your latest invention? Do you still think it's money?