Company valuation is not only about financials: the story you present to investors significantly influences the results of the negotiation process. Gianluca Valentini, co-founder of Equidam, explains what valuation really is about and how to lead investors to agree on a good one.
(Author: Giulia Girardi, Equidam / Image Credit: Maximilian Weisbecker)
Let’s break down valuation to what it actually is.
Valuation is nothing else than an agreement between two parties, on the price for the transfer of a business. It’s as simple as that: it’s the price.
Thus, whenever a price is involved, there is a good part of negotiation between party A and party B, because the first will try to sell the business as high as possible while the latter will try to buy the business at a price as low as possible.
If each of them has a different opinion, how do you combine them? That’s where valuation comes into the practice.
That’s where you use an objective and disciplined approach to estimate the value of the business, in a way that the other party is convinced about your opinion or vice versa.
Valuation is an argumentation about your opinion on what the value of your company should be. The financial modelling is a weapon to get your point across, to back up your claim, but it’s not something that has a mean on his own.
So, how to get a good valuation?
In other terms, how to have a good argumentation of your opinion on your company value? You need to have a good story.
Numbers are just numbers, they don’t mean anything unless they are backed up by a story.
How to present a good story
A good story is based on three pillars and a background.
The context is the scenario, the environment where your story is going to take place. That’s where you or your company is going to be able to thrive, where your story is going to begin and end. In terms of valuation, the context is the market, its trends, its dynamics and how those are going to impact your company.
If you get this right, the question will shift from “Is this going to happen or not?” to “Is this the right company to take advantage of these trends?”
It is very important that the context feels inevitable, that is going to happen nonetheless, regardless of what your company does.
This aspect is often misunderstood by entrepreneurs and it should be highlighted as much as the story of the company. Make sure that they feel like they’re missing out if they don’t buy into your company.
3 pillars that ensure a good story
Once you present the context right, then your story comes into action. Your story should be:
This means you should point our the broad vision of the company, the long-term goal the company. Some authors also refer to it as BHAG (big hairy audacious goal).
What is your company going to look like in 10 to 20 years time? What is that the broader sense that the company has? Why is the company even existing? What do you believe into?
This means that the story should sound credible in the limits of reasonability. It means that, in the scenario that you depicted in the context, you should give a clear understanding of how and what the company can achieve. In other terms, these are the mid term goals of the company, from 3 to five 5 time, or it can also be described as the “how”.
Based on the recent history of the company, based on the facts that have been presented, what is the most likely scenario for the immediate future of the company? This is the short term development of the company. It also means the “what”.