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.