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How do I value my business for a Business Angel?

What is my business worth?

This is perhaps the single most asked question that we receive from potential clients. What is my business worth?

Valuing a business is extremely subjective for those that are both financially and emotionally invested in the project and moving past the emotion to arrive at what would be acceptable to a potential investor can be painful.

There are two things that we would stress about valuation and equity finance right from the outset.

1. Valuations can be ‘flexible’ (to a degree) - there are reasonably straightforward mechanisms that can be used to satisfy people with differing views on valuation

This means that if you feel your business is worth more than a potential investor does we can still proceed with a deal with your valuation being achieved based on performance.

2. Equity investors add financial value from the moment they invest.

This is sometimes difficult for clients to intuitively accept as their concern tends to focus around how much of the business they are ‘giving away’ to the investor but consider this:

Let’s assume that your business is worth £100,000 and you sell a 10% share to an investor for £10,000;  You now own 90% of your business which may initially lead you to think that your stake is now wirth £90,000.

But, and it’s a big but… a business is always valued on a plus cash basis.

So the business, post investment, is now worth £110,000 (the original value plus £10,000 in cash).  So your 90% stake is now actually worth £99,000.  You have sold 10% of your business but only ‘lost’ £1,000 in terms of the value of your stake.

Valuation guidelines

Although various formal valuation methods and calculations exist these tend to lend themselves much more to established businesses looking to grow, rather than early stage businesses who may have little or no sales income.

There are lots of variables and moving parts; for example, a great idea with no intellectual property (IP) potential is worth less than one with IP potential, and one that actually has IP is worth more.

As a very broad rule of thumb, we suggest:

  • A great idea with no IP - is worth up to £100,000;
  • A great idea with IP is worth up to £300,000;
  • A great ideas with working prototype and market research is worth up to £750,000
  • An early stage business with revenue traction is worth up to £1,500,000 

These are the starting points in terms of valuation thought processes and the detail with the detail determining how far from any of the above valuations a proposal deviates.

As you can see from the above, revenue makes a significant difference to value as it is a great informer.  

It not only demonstrates that consumers are prepared to actually part with cash for your product or service but also helps inform price point, cost of sale, re-order cadence, payment terms, quality issues, support costs - all the things that are essentially estimates prior to the moment a sale is made.

So in short, valuation is a mix of subjective views (on both sides) with reference to clear expectations that reveal how much justification is required.  An apparently unrealistic valuation with no justification will kill any prospects of investment instantly.

We have helped early stage businesses raise equity investment for more than 20 years and are happy to look at a business plan and provide initial guidance on a free of charge, no obligation basis.

Our fee structure is then a small upfront fee of £650 or £1,850 depending on how much you are looking to raise plus an additional success fee which is contingent on the amount raised.

Need help and advice?

To chat through your options feel free to drop me a line at phil@nbsadvisory.co.uk, or complete the contact form or call +44 7596 537289