You're out: to grow your business further, you need investors. This is an important step, so you're not going to take any chances. One of the first things you're going to do now is determine the value of your business. But what is my business worth? If you don't know that, it's going to be hard to find investors. In this article, you'll learn how to determine the value of your business using the Discounted Cash Flow method (DCF method), among other methods.
3 methods to determine the value of your business
There is no holy grail when it comes to determining the value of your business. But that doesn't mean there are no handles. The following 3 business valuation methods are commonly used to estimate the value of a business:
- Discounted cash flow
- Venture capital method
- Market multiples
Below we briefly explain what these methods entail. Finally, we'll tell you about a fourth option: deferring business valuation.
Discounted cash flow method (DCF method)
In a Discounted Cash Flow method, or DCF method for short, your business is valued based on future cash flows. In other words, we look at the money you can make from your business in the future, the free cash flow. To do this, you map out all future cash flows, then offset the incoming with the outgoing. You then discount the free cash flow. That means using a chosen interest rate to convert the future amount back to its present value. We do this using the cost of capital or discount rate. Once your free cash flow is discounted, you have the value of your business to hand.
Venture capital method
An investor is not a charity: he wants value for money. With the venture capital method, we look at the potential value of the investment at the time the investor wants to get out again. This method looks at the business valuation from the investor's point of view, and less from your point of view as an entrepreneur.
With this method, the investor must determine in advance how much he wants to earn back with his investment, the "return on investment. In addition, he must have an idea of the value of your company in a number of years, when he wants to sell his share again.
With these 2 elements, an investor can calculate back and determine how much to invest in your company now.
You can value your company by working with multiples. This is simpler than using the DCF or venture capital method. The value of your company is based on amounts for which comparable companies have been sold. However, it is important here that the risk profiles of both companies are the same. One of the most commonly used multiples is the Enterprise Value multiple: Enterprise Value / EBITDA. This formula indicates how long it will take to recoup the acquisition of (100% of) the company at constant EBITDA.
What is my business worth?
Hopefully, you can now answer the question , "What is my business worth? But whatever method you use to determine the value of your business: there is always room for debate. That makes sense, because you and the investor have different interests. He prefers to pay as little as possible per share, while you want to get as much as possible per share. Therefore, a combination of methods is usually used to determine the value. Still, a valuation discussion can remain quite tricky. But there are other methods, such as the convertible loan.
We see these coming back more and more often. Here the investor lends you an amount of money without getting shares in return immediately. It is agreed in advance when the loan will be converted into shares. Often the investor receives a discount on the then current valuation for the risk he took earlier.
Become investor ready?
Valuing your business is one of the steps you need to take to attract investors. Raising funding involves more than just valuing your business. Wondering how you can become investor ready? Then download our white paper!
In this white paper:
- What challenges do you face and how do you deal with them?
- Becoming investor ready in four steps!
- An overview of all funding options
Please note that this whitepaper is only available in Dutch at the moment. We are in the process of translating this whitepaper.