The Elements of Business Valuation: A Clear and Concise Guide

Introduction

Business valuation is an art. It requires precision, clarity, and a keen understanding of the fundamental elements that define a company’s worth. To value a business accurately, one must grasp the essential components, much like a writer mastering the elements of style. Here are the key principles to guide you through the process of business valuation, articulated with the simplicity and elegance reminiscent of Strunk and White’s timeless advice.

Know Your Purpose

Begin with the end in mind. Define why you are valuing the business. Is it for a sale, merger, investment, or legal dispute? The purpose influences the approach and methods used. Be clear about your objective.

Understand the Business

Grasp the essence of the business. Know its products, services, market, and competition. Study its history and future prospects. A thorough understanding is the foundation of accurate valuation.

Financial Statements Speak Volumes

Analyze the financial statements with care. Look at the income statement, balance sheet, and cash flow statement. They reveal the financial health and performance of the business. Each number tells a story; listen to it.

Earnings Are Key

Focus on earnings. They are the lifeblood of any business. Assess past earnings, but also project future earnings. Look at both profitability and growth potential. Earnings drive value.

Consider Cash Flow

Cash flow matters. It’s the actual money flowing in and out of the business. Discounted cash flow (DCF) analysis is a common method. Future cash flows, discounted to present value, show what the business is worth today.

Market Comparison

Compare with peers. Look at similar businesses in the same industry. Market multiples, like price-to-earnings (P/E) or EBITDA multiples, provide benchmarks. They offer a reality check against your valuation.

Asset Valuation

Don’t ignore the assets. Tangible assets like real estate, equipment, and inventory hold value. Intangible assets, such as intellectual property and brand reputation, can be significant. Assess both types thoroughly.

Factor in Liabilities

Subtract liabilities. They reduce the value of the business. Include all debts and obligations. A clear picture of net assets helps in accurate valuation.

Growth Potential

Growth potential adds value. Consider the future prospects of the business. Market trends, competitive advantage, and scalability influence growth. A business with strong growth potential is worth more.

Risk Assessment

Evaluate risks. Every business faces uncertainties. Market risks, operational risks, and financial risks must be assessed. Higher risk reduces value; lower risk enhances it.

Be Objective

Stay objective. Avoid emotional attachment. Use data and facts to guide your valuation. Subjectivity can cloud judgment and skew results.

Use Multiple Methods

Apply multiple methods. No single method is perfect. Combining different approaches provides a balanced view. Reconcile the results for a comprehensive valuation.

Seek Expert Advice

Consult experts when needed. Valuation is complex. Financial advisors, accountants, and valuation specialists can provide valuable insights and accuracy.

Keep It Simple

Simplicity is key. Avoid unnecessary complexity. Present your valuation clearly and concisely. A straightforward approach enhances understanding and credibility.

Review and Revise

Review and revise. Valuation is not static. Markets change, and businesses evolve. Regular updates ensure your valuation remains relevant and accurate.

Conclusion

Business valuation, like good writing, requires clarity, precision, and attention to detail. By adhering to these principles, you can master the art of valuation, much as Strunk and White taught us to master the elements of style. Remember, the goal is to arrive at a fair and accurate value, reflecting the true worth of the business.

Need Help? Contact us.

Can You See Your Cash?

A looming economic downturn has resurrected the “Cash is King” mantra placing cash flow visibility straight into owners & leaders cross hairs. So I ask, how do we get more visibility into the future cash needs & uses to avoid (or minimize) any turbulence in operations?

Some may wonder, why cash becomes more important when the economy sours. As the Fed increases interest rates, the cost of easy money becomes more expensive. This increase quickly erodes profit margins. Collecting cash requires discipline, consistency & a business wide commitment. The reality is, cash is everyone’s responsibility. Without cash, businesses can’t pay for the basics such as supplier invoices timely. You may get a reputation for slow payments and obtaining favorable credit could cost you more money or, in extreme circumstances, suppliers may withhold shipments of critical goods & services until payment is made. More practical uses of cash include payroll – a key asset. Whispers in the halls detract from productivity and hamper profitability. Steadfast collections are critical to cultivating a “Cash is King” culture.

Weekly meetings & measurement help drive focus and accountability to ensure cash is collected timely & spot problems quickly. Develop a credit management plan and use it. Make certain you refer, revise and refresh the plan as business needs arise.

These meetings should be folded into existing weekly operations meetings so that stakeholders understand issues & can provide critical information and support to collection activities. Collections are part of the business; not a separate activity.

At CCS, we develop a comprehensive approach to improving cash collections & can implement a solution to fit your needs. If you are looking for a cash solution to collect your Almighty dollar, we recommend giving us a holler!

Funding for Growth

[Part 1 of a 2 part series – reproduced from a presentation given to a group of incubator companies back in early 2021]

Almost every business needs to fund raise at some point or another. In particular, for smaller, younger businesses and startups in their early growth phases, cash flow can be a vital life to keep the business going. Highlighted below are some of the traditional fundraising methods, as well as some fresh alternatives that may be considered.

Bootstrapping

Many entrepreneurs live by the age-old adage that you shouldn’t spend what you don’t have. And nowhere is this more applicable than in business, where bootstrapping is the founding philosophy. Bootstrapping effectively means growing your company using your own resources. Any extra cash generated by the business is then re-invested back into the business, which allows the company to grow organically.

Although this can often be a slower way of scaling and growing a company, the advantage is that business owners maintain complete control over the company and its direction. Increasingly, this type of organic growth and early validation tends to add to the entrepreneur’s credibility, since the founder may be regarded as somebody who prefers not to risk outside investors’ money until the business shows more visible signs of success. With an increasingly competitive landscape of startups seeking funding, or with more entrepreneurs wishing to maintain control of their companies from the outset, bootstrapping is now regarded as the de facto starting point for many young companies.

That said, there are exceptions of course. Some companies with huge potential for scale realize that the slower organic growth route might potentially lead them to miss out on market opportunities that require significant investment in plant, equipment, or other assets such as technology to allow them to deliver their solutions. Here, timing is essential.

While bootstrapping may be the only option in the early days, exiting from bootstrapping mode once a company has gained significant market validation and traction may seek external investment sooner as a more sensible growth option depending on circumstances. Assuming the company has already gained that validation, then a company also achieved vital credibility with potential investors, and now the company is one step ahead of competitors in securing investment.

How to raise money for a business

Companies may be considering that the time has come to consider other ways of raising finance. For example, a company may have exhausted all bootstrapping options, there is a real need vital cash flow in the business to keep operations going, or the company has reached a point of customer or market validation and need to scale faster. In these scenarios, the good news is that there are a variety of fundraising sources, depending on a company’s specific situation. We’ll first cover off the more traditional sources of funding that companies may already be familiar with and then touch on some of the newer approaches.

Apply for a bank loan [traditional]

Historically, new businesses had more opportunities to approach a bank in order to secure vital funding through small business loans. Unfortunately, in today’s market, that’s no longer the case for a variety of reasons. Unless a company can demonstrate a very steady and regular revenue stream over at least the previous 24-36 months, this option will most likely be out of the question for most banks. Since the 2008 financial crisis, banks have now become notorious for not lending money to early-stage companies, even for founders with good credit histories and ample security. What’s more, many government-backed lending schemes that might have underwritten startup business loans several years ago now seem to have dried up. So, the guiding principle is this: unless you can demonstrate two years of steady cash flow, bank financing options are limited.

Grants [traditional]

Grants from government bodies have traditionally been regarded as a standard way of receiving some form of vital financing, similar to bank loans. However, in today’s increasingly entrepreneurial environment, this pool is also drying up and is no longer widely regarded as a real possibility for most business owners – in any substantial form at least.

That said, governments and regional economic development agencies are at times likely to stimulate growth in certain industry areas – such as supporting the development of certain technologies like AI or nanotechnology, or the migration from fossil fuels to newer, cleaner forms of energy. Governmental support can also stimulate the economic regeneration of certain regions by encouraging the growth of certain businesses within that region or the migration of businesses to that region.

If a company thinks they might qualify for such grants, or if they are willing to relocate the business, then it might be a worthwhile investment in time to do some research upfront. Applying for government grants can often be an arduous and time-consuming process, and if successful, then the company will have to think about regular written progress updates. But sometimes these grants, if available, can be substantial and they might spare the company the effort of seeking external investors and giving away equity in the business.

In general, though, government grants are rare. Do the research as part of an initial fundraising “scanning” exercise, but assume in most cases that a company may not qualify, unless it fits certain criteria.

Friends and family [traditional]

Securing funding from friends and family is one of the most popular ways to raise money when starting out. While your “inner circle” may not have a lot of relevant experience in your industry, they might nevertheless be willing to invest their money based on their trust in you and their judgment of your character. That’s already a lot – especially during the early stages of a business. Also bear in mind that taking any money from friends or family has the potential to sour personal relationships if things don’t go as planned. If you’re taking out a loan, make sure you have a clear written agreement in place. And if you’re seeking equity investment, then treat your friends and family in the same way that you would treat any other investor by providing the same set of risk statements and legal documentation. Always consult your attorney before taking investments from individuals.

Angel investors [fresh]

An angel investor is an individual (or a group of individuals) who puts his/her money on the line when investing in a business. Typically, although not always, angel investors are considered a strategic choice for an entrepreneur during the early growth stages of a business. For this reason, an angel’s investment capital is considered to be “at risk,” and angels typically take a larger equity stake in the business, relative to the perceived lower business risk further down the line.

Most angel investors are considered “sophisticated” in that they know the risks, process, and timelines involved during the angel investment process. Ideally, a company will want to be dealing with an experienced angel investor with prior experience of investing in small businesses. It might be easier for a high-net-worth individual to write a check, but even experienced investors might get upset if they didn’t fully realize what they were getting themselves into. The promise of an exciting new product or service might lure the right angel investors. However, be absolutely certain you’ve carried out thorough research and that you’re clear, transparent, and realistic about the future prospects of the business. Also, identify any potential red flags in the business plan – this will come out during any investor due diligence, so it’s always better to address any concerns now before the investor discovers them later. And, as always, a clear and compelling business plan and a strong and enthusiastic management team are vital ingredients in attracting the right angel investors.

There are many ways of finding angel investors. Perhaps the best way to get started is by using an online angel investing platform such as AngelList. It allows angel investors to quickly identify and assess the best available investment opportunities on the market and for startups and their teams to showcase their potential.

Investment crowdfunding campaigns [fresh]

Crowdfunding has become a lot more popular over the past few years. Securities crowdfunding campaigns give investors a slice of the company’s equity in return for investment. The underlying principle of investment crowdfunding is simple: break down a large funding requirement into much smaller investment “chunks,” so that each chunk becomes more attractive and accessible to the ordinary individual, thereby increasing the probability of closing the investment round sooner.

In addition, crowdfunding is also increasingly regarded as a good initial strategy for validating the business. There can be no better way of securing endorsement for a business than having a large group of small investors putting their money into it when compared to a smaller group of larger investors.

Another added advantage of crowdfunding is the reduction of potential control wielded by larger investors. In the days before crowdfunding, the only source of funding was through high-net-worth investors. Because the investment “ticket” sizes tended to be larger, individual equity stakes were also larger. Therefore, larger investors always want to protect their investment by taking a position on the board and/or insisting on a certain share class that will give them a certain degree of control over the company or prevent the owners from taking certain decisions without their consent through voting rights.

The smaller investment nature of “ticket” sizes in crowdfunding typically allows owners to circumvent this by spreading investor exposure over a larger number of smaller investors. On the other hand, owners will have a lot more investors on a company’s Cap Table to communicate with and administer, but this could be considered a small price to pay if it means an owner can close the funding round and go some way towards validating the product or service.

Venture capitalists [fresh]

Finally, venture capitalists (VCs) are another vital source of funding. Venture capital funds are institutions that assemble funds on behalf of other institutional investors for the purpose of investing in high-potential startups with the potential to scale fast.

Typically, venture capital funds only invest in business once there is demonstrable customer traction, and for that reason, they tend to engage further down the line. However, investments tend to be much larger and will often involve the participation of the VC on the company’s board with much stricter levels of scrutiny.

A company should have a pitch deck that explains why the business is different (innovations, a shift in the industry, persistent problems that are being solved), what exactly the business does and outline the facts about the company’s story and financials, as well as detailed evidence of traction and progress.

Finally, decision makers will want to highlight the experiences and abilities of the team. Condensing all of this info down into a simple elevator pitch can be the make or break of the pitch.

Key takeaways
As you can see, there are many different ways to raise money for your business. Every business has needs and preferences which will dictate the approach you will take. Raising money through the traditional approach is more restricted than ever, although not entirely impossible. That’s why it’s worth considering newer and more flexible ways of securing funding.

Angel investors and crowdfunding are perhaps the most promising route for a lot of businesses, so checking out AngelList should be high on your priority list.

We.Ride.

We have a passion for cycling (both mountain bikes and road bikes) centered on work/life balance. We believe it’s one of the keys to providing best-in-class service.

We are often asked about the places we ride, the equipment we use, and our clothing preferences. Why? Who knows but it’s a great topic & nice icebreaker when getting to know people.

Below are some resources for you.

Frequent Places We Ride

• Mt Diablo State Park

• China Camp State Park ($3 day use fee)

• Lime Ridge Open Space

• Joaquin Miller Park

• Bike Map resources: MTB Project (online), Bay Area MTB Maps (print)

Equipment & Gear We Use

• Manual Floor Pump

• Mobile Compressor Pump

• Hand Mini Pump (in the pack/on the trail)

• CO2 Pump (in the pack/on the trail)

• Socks: Defeet Woolie Boolie Socks –> Comment: We don’t like cold feet. We own several pairs of these bad boys & they keep the tootsies toasty on those chilly days

• Gloves: DEFEET ET Dura Glove (cold weather); Fox Racing DIRTPAW (warm weather).

• Baselayers: Craft Active Extreme X Wind (Winter) ; DEFEET Base Layer (Summer)

• Jackets/Vests: Pearl Izumi Vest you’ll be glad you did)

• Arm Warmers: Pearl Izumi Thermal Fleece (trust us!)

• Elbow/Knee Pads: G-Form Pro X2 Knee Pads.

• Shoes: Sidi (Road & Mountain). Prices vary.

• Helmets POC Trabec – Great for all purpose trail riding & XC.

• Fox Proframe Full Face MTB Bike Helmet for knarly downhill and when we are just gonna flat out press it.

• Hydration: Osprey Raptor 14

• Tools: Topeak Digial Tire Gauge; Topeak Mini Multi Tool; Pedro’s Tire Levers (yellow, green & orange)

Organizations We Support

• National Interscholastic Cycling Association

• NorCal High School Cycling League

• Bicycle Trails Council of the East Bay