When watching the Dragons Den or the Shark’s Tank have you ever wondered how some of the entrepreneurs came up with their evaluation for their business? They often seem to be many multiples more than their sales with little consideration for the actual profitability. And more to our amazement, the sharks and dragons quickly calculate what they think the business value is by using a small pad of paper and a pen when most of us would require a computer program. From these shows you would definitely classify business evaluation as an art rather than a science because there seem to be very few facts or calculations involved in the process. Even though it’s reality TV and the due diligence follows through before any cheques are cut, we can get an idea of some of the key factors the financiers are looking for to substantiate their evaluations.
The key factors that they quickly scan the entrepreneur for are not unlike those used by John Warrillow, developer of The Value Builder, a proprietary system for assessing a company’s real worth to a prospective buyer or investor. Often barely giving the entrepreneur an opportunity to fully describe his product the Sharks and Dragons want to know the numbers, specifically the numbers that provide the financial history in sales and profitability. These are obviously very important in the valuation, but not the only valuable numbers. Future growth potential is paramount in understanding the upside to the equation of how big this company could become and what premium is logical to pay upfront to be in the game. If the company is to grow quickly how dependent is it on the current owner/operator, key employees or present suppliers?
If the entrepreneur is lucky to get past this point, financiers will look deeper into the operations, wondering about working capital and the ability of the business to fund future expansion or will they be asked for further funding. The question of recurring revenues or seasonal sales cycles often stomps some of the pitches as entrepreneurs are questioned on critical elements of customer acquisition costs and lifetime value of customers. They may also be confronted with how their product is protected or differentiated enough to create a monopoly like environment, creating barriers to competitors. Unfortunately, most of the companies are too fresh out of the gate to have a long history of customer satisfaction or referrals that could be quantified. The last, and ultimate, question the Sharks or Dragons look to answer is “Is success dependent on this owner, do I want to be in business with them or take control and buy a controlling interest?”.
I always enjoy these shows with the tension between investor and entrepreneur as they try in a few minutes to evaluate the shares offered for sale. There is, however, a much more scientific method to complete such an evaluation for your company called the Value Builder Assessment questionnaire. A simple 15 minute survey evaluates the 8 key drivers of corporate value mentioned above and produces for you an overall score which translates into an estimate of value of your company and is accompanied by a detailed 25 page report.
Contact me at jvankoeverden@localhost to take the on-line questionnaire. As a Certified Value Builder Advisor, I will review the results with you and start you on the path of creating a more valuable company.
