Making the decision to raise funds via equity crowdfunding breeds more decisions. How much money do you need to raise? What percentage of the company will you offer? And how do you go about putting a dollars-and-cents value on the operation you’ve poured blood, sweat and tears into?
It’s a rare founder that can look at their business with an unbiased view. A third-party estimation is essential in avoiding over-inflation (or underestimation) of your company’s true value. Ultimately, just like you’ll hear real estate agents saying about houses, it’s only worth what someone is willing to pay for it. But certain metrics can be employed to reach an educated, fair, and accurate-as-possible valuation to present to the market.
How much money should I raise?
If you have a strong notion of the amount you need to take your business to the next level, whether it's branding and marketing, team hires or some good old R&D, you might want to start with the question of how much money you need to raise. From there, you can decide how much of the company you want to portion off in return.
A good rule of thumb when raising capital through equity crowdfunding is covering your expenses for (at least) 12 months. Looking at it this way makes it easier to establish your target figure. Simply calculate your monthly expenditures, add your planned expenses, and multiply them by 12.
What percentage of the company should I sell?
To work out what to offer, you need to understand what an investor will want to make back. Equity crowdfunding projects are riskier than property, for which a good yield is 6-7%, and far riskier than a savings account. Early equity investors will want to see at least 20% returns for their trouble, some even higher, reflecting the risk-reward paradigm they’re facing. It’s up to you to hold your ground and think about what is best for the company.
What is taken into account when a business gets valued?
The two key factors influencing the value of your business are projected profit against potential risk. But in order to understand these opposing factors and draw a balanced conclusion, a valuation needs to look deeply into the following four categories:
The strength of your position will be reflected in what your business is “worth” to investors. Are you pulling in strong revenue? Do you have minimal or healthy debt? This contributes greater worth to your proposition than a founder being forced to sell due to mismanagement, plummeting sales figures, or personal issues such as poor health.
If you have physical assets, it’s much easier to tally up the overall value of your operation. This is because tangible assets hold a fixed value and can be sold if needed. This could be anything from stock to equipment to vehicles or property. If you’re a web or services-based operation, it can be a bit more nebulous to establish a value.
Intangible assets are a little more interesting (and a little more complex) than tangible assets, and they can be just as valuable. They include things that are slightly harder to measure, like brand presence, reputation, and potential for growth. Intangible assets also includes IP such as patents. This is a particularly important area for seeking guidance from a professional valuer.
Length of time
Older businesses are easier to value than younger ones, for the obvious reason a valuer can take a broader view of accounts, cash flow, information, and proof of continued success. Valuing a company less than 2 years old comes with inherent uncertainties and risk, as many businesses enjoy a burst of success after launch, but may not be able to go the distance.
What techniques will be used to value my business?
In order to work through these problems, a valuer will use a range of calculations:
An asset valuation is a basic sum: business assets minus business liabilities.
Naturally, this valuation technique is most applicable when dealing with tangible, asset-rich businesses. It starts with the net book value (NBV) of assets listed in the business accounts, and takes into account debts to the business, property, and stock (including old stock that may need to be sold at a reduced price). It doesn’t usually take into account intangible things like brand presence.
Price-earnings ratios, and which to use
The price-earnings ratio is another relatively simple calculation: the value of a business ÷ profits after tax.
Depending on your industry, you may be able to work to a standard P/E ratio - your accountant will be able to advise you on this, as can your industry association. This is perhaps the most tricky part of the process, and the ratio you choose will need to be justified to your buyer.
Although the valuation process is consistent, each individual founder will have unique questions that need expert answers. STAX's Listings team can help you with all them - contact us for a no-obligation chat.