Douglas Lawson, Co-Founder and CEO of MarktoMarket, talks Knowing Your Worth
Valuation is often said to be an art, but what would you say a normal valuation process should look like?
Valuation of any asset is really about benchmarking to the market. With businesses, you are trying to find valuation data on comparable companies (“comparables” or “comps”) that have undergone a transaction recently.
In its simplest form, you are looking at the multiple of profit that was paid for each of the comps, then calculating the median or mean multiple from your sample and applying it to the profits of the business you are valuing. This becomes trickier when the company you are valuing is not profitable (which is the usual case with companies seeking venture funding) – in these cases, people often default to revenue, rather than profit, multiples. For businesses that are pre-revenue, more creativity is needed. Some experts favour discounted cashflow (DCF) models, which predict the future cashflows of a business, then discount them back to arrive at a present-day valuation.
Being armed with this data helps your valuation argument but it is a basis for a negotiation. Ultimately, the price paid will depend on how attractive the asset is in the eyes of the buyer and how much competition there is for the asset. Anyone who has ever sold a house will understand this.
What are the key variables in valuing a private company?
Going back to the most straightforward method of valuing a company – the multiples based approach – the multiple chosen will vary depending on a number of factors.
For example, different industries tend to be valued at different multiples due to perceived quality of earnings. For example, software companies with recurring revenues will, in general, be more highly-prized than hardware businesses with one-off sales.
Another variable is size – all other things being equal, a larger business will typically attract a higher multiple than its smaller counterpart, the consensus being that size makes a company less risky.
Growth will also impact pricing. High growth businesses can attract elevated multiples as, if the growth is sustainable, the profits will “grow into” the multiple. In other words, whilst the price may look initially high as a multiple of profits, this multiple will appear more modest on a forward-looking view.
What trends are you seeing in valuations for scale ups in the UK just now?
We are seeing valuations contracting but not to the same extent as the public companies. The trend that is more indicative of the health of scale ups is the number of deals and quantum of funding being invested in this area. On this measure, the picture is bleak – the last quarter saw Series B+ (investments of £10 million and over in scale-ups) funding shrink by 66%.
What does MarktoMarket do and how could it help founders?
MarktoMarket is a data platform with rich intelligence on private companies, particularly SMEs and start-ups. It helps advisers and investors identify, research, value and connect with businesses.