Valuing a Business for Investors
Investors care about your discounted cash flow or DCF
Why Value a Business When Seeking Investment Opportunities
As a symbiotic and mutually productive relationship, businesses and investors have much to offer each other. A harmonious relationship between business and investor creates a healthy financial situation for all parties involved. But how do you decide on a company’s value?
Investors empower companies to pursue new opportunities by providing essential funds to businesses and comfortably navigate potential risks. Investors can also act as a business guide, providing a unique, less biased perspective based on years of experience and strategy. Businesses will provide investors with potential returns on investments, creating profits and boosting investor portfolios.
When investors want to create new business relationships, a professional business valuation or business appraisal will provide them with the tools they need to make informed and confident decisions. Business valuations are essential for investors to choose a business right for them.
Understand more with our article what is a business valuation and why investors value DCF valuations.
What is a Business Valuation for Investors?
A business valuation is the process that will determine a business’s most accurate economic value and financial health. These valuations will often occur during financial events within a business’s lifecycle, and in this case, the event being a potential investment.
Business valuations are calculated with the help of an accredited business appraiser, who will analyze all parts of a company to determine the value and subsequent sum of the economic value of a business. Company valuations go beyond your business’s surface economic value, and by taking a deep plunge into all relevant factors that make up your business’s financial profile, the most true and accurate value possible can become known.
This resulting valuation model demonstrates the real worth of your business, empowering your potential investment bankers to hold a true understanding of your business’ value. Mergers and Acquisitions firms often use third party valuation companies for both buy-side and sell-side engagements.
Learn further on how to value a business with our comprehensive guide on how to value a business.
Which Business Appraisal Method is Right to Value a Business for Investors?
Investors will most commonly be interested in the discounted cash flow method. As it presents the current value of a business based on its future cash flow, investors can enjoy a holistic view of a business and intimately understand its current financial health and future potential for returns. By including a wide variety of potential scenarios or risks, the DCF method provides a unique level of flexibility and accuracy that investors are often partial to.
How is the Discounted Cash Flow Method Calculated?
Many consider this to be the most reliable method for valuing a business. As a result, many investors prefer the discounted cash flow DCF method. To determine a business’s value through the DCF method, keep these three important aspects:
- How much the business is worth today based on projections of future earnings growth rate
- The investor’s expected rate of return or discount rates
- How much equity the investor will receive for their investment
- The Market and future interest rate environment
Factors Investors Care About
As three of the four factors in this method directly involve the impact on investors, it is clear why many investors hold the time value of free cash flow as their standard. Also, they will compare the return they think your company will give them versus the stock market. They also may have investment banking to research alternative investments like real estate and low-risk T-bills. Your potential market capitalization is important, too.
The net present value of your future cash flows is critical so you can close investors on your vision. The consistency of your future cash flows and cash flow analysis drives the value of your discounted cash flow. The time value of money matters in your financial modeling.
What if you are a pre-revenue business looking for investors? Read how we value pre-revenue start-ups based on the present value of future cash flow valuation. We will also look at your working capital burn rate.
Discount Rate Used
While the discounted cash flow DCF model is the most typical method to show your business’s value while seeking investment, each business’s financial situation is unique and personal. And some investors may also hold specific preferences for a different method to use. The experienced business valuators at Business Appraisal FL|GA|HI will use their knowledge and expertise to determine which valuation technique will provide the most accurate market value for its assets.
Understand more about the different business valuation methods and how they provide investors with the basis of your financial situation.
What Factors Impact Investors the Most?
When assessing business valuations, there are a few different factors that investors will typically be interested in the most. They include:
Financial history and projected future
Investors seek to put their money where potential returns will be consistently supported. By assessing a company’s history, its net present, what it earned in the past, and its future projected growth rate, an investor can determine if these figures align with their goals.
Selling your business? Read our article obtain a business valuation before you sell your business.
Potential for risk and opportunity
Business valuations will predict both opportunities and risks alike. By deeply understanding a company’s financial situation, you can uncover potential risks and opportunities for growth. It also allows businesses to prepare for various situations. As investors play a large role in risky situations and scenarios of growth and expansion, this analysis of potential risk and reward helps paint a clear picture of these potential situations.
The benefits of business valuations for business owners don’t stop at just creating opportunities for investment. Understand more about how a business valuation benefits you with our article about the top 7 benefits of getting a business valuation.
Intangible Assets, Intellectual Property, and Goodwill
Not all of a company’s value can be found in its balance sheet, and intangible business assets, or goodwill, perfectly represent this concept. Also included in business valuations, goodwill illustrates more abstract assets such as company reputation, company branding, customer relationships, and employee expertise. These intangible assets are important for an investor to determine if a company is in alignment with its values.
Understand more about goodwill and how it brings value to your business, and the difference between personal goodwill vs business goodwill.
External industry conditions
Our world is full of a diverse profile of different businesses, and each business – and especially in their specific industry – uniquely impacts the external industry conditions. Supply and demand, market trends, and competition are all factors of similar companies that will provide investors with a strong context of the business at hand. Reviewing comparable companies can also provide context on a business’s true worth.
You also have to take government risk into account. For example, the condo collapse in Florida has changed the laws for those working in concrete restoration and looking to HOA repair funds.
Also, know what counts as an add-back when valuing a company with our article understanding add-backs when selling a business.
Valuing a Business for Investment Opportunities
Business valuations are the catalyst for fostering partnerships between investors and businesses, and by demonstrating to investors the true worth of a company, business valuations are essential in facilitating these mutually beneficial relationships. When you want to secure investment, receiving a business valuation is an ideal place to begin.
Start your journey to realize the benefits of a potential investment with a business valuation. Now, reach out to BA FL|GA|HI to find out what your company is worth through our professional valuation services from our accredited business valuation professionals.