Establishing the value of your business investments can be difficult. While well-known valuation methods can give you a rough idea, ultimately your business is only worth what someone is prepared to pay for it.
In 2001, there were over 1,000 public offerings. Few flourished and several lost much of their value or went out of business. The culprit seems to have been excessive forecasts and losses in addition to a decline in the economy and tech forecasts. Greed among many of the participants, including prominent venture capital and investment banking firms, was also a significant factor. As a result, there were few new issues in 2022 and they are only now starting up again in 2023.
In contrast, there are over 1 million new small business startups since the pandemic. While many have achieved their goals, a significant number of them never really became significant or will exit the market within 5 years. These are mostly individual or small entrepreneurial efforts with expectations of less than a few hundred thousand dollars in volume. Their goal is to provide income, growth, and a better lifestyle for the entrepreneur.
These differences illustrate the need to understand goals and parameters when analyzing the value of your business or stock. For example, retirees building a nest egg for their heirs have quite different perspectives from families who need their wealth to fund their own retirement. Additionally, much of our country’s wealth is concentrated in 5-10% of our population. Thus, in 2002, much of the tech stock decline had minimal impact on wealthy individuals while affecting the income of retirees with investments of less than $100,000.
A critical and frequently overlooked factor in evaluating investments is risk. Investors seem to be willing to take higher risks in order to get higher returns. Much of the debacle with the 2001 new issues was due to funding extreme forecasts with high risks. Venture capital firms do mitigate some of the risk by funding many deals and only needing a few successes. In contrast, most individuals are more risk averse, especially people planning retirement.
Tools and criteria to evaluate businesses greatly affect valuations as well. Long-term versus short-term, fixed versus variable streams of income, risk, growth versus income, and earnings can all affect perspectives. Just consider the variations in value between your home, a fixed pension, and tech stocks.
Special features like skilled employees, intellectual property or other special strengths of your business can increase investment value. A few years ago, “tech” was almost holy as an investment. Basic industries like autos, housing, retail, and utilities may have significant fluctuation as they are experiencing little long-term growth. In contrast, A.I. and electric cars seem to be the major hot industries today.
There are several standard techniques that can be used to provide a benchmark to determine the value of your business investments. Using different valuation methods can help you come up with a range of valuations for your business. Values are also affected by social, economic, and psychological environments. For example, values of sports teams have experienced unimaginable growth because of the desires and wealth of many billionaires.
Measures like P.E., present value and discounted cash flow are generally considered the standard for evaluating investments. One of the advantages is they can be analyzed to consider factors like annualized returns in order to compare investments. For example, growth companies will expect higher P.E.’s than stable companies.
Profits and cash are critical factors in evaluation particularly for small entrepreneurial companies. These measures need to be mitigated by benefits, taxes, and investments not apparent in cash benefits. For example, a significant advantage of many tech companies is the minimal investment aside from people and marketing. Thus buildings, factories, equipment etc. are not required. Even manufacturing is frequently contracted out to reduce investment and provide cheaper sourcing. Many public companies have also modified disbursements to owners. In particular, stock buy backs rather than dividends allow more flexibility and tax benefits.
The value of assets and liabilities in your investment is a critical factor in your valuation. These values can be significantly different from book value and need to be considered Real Estate valuations, and the ability to borrow money at reasonable interest rates is a critical consideration.
Startup or entry costs are also significant aspects of valuation. The valuation includes the costs of purchasing assets, developing products or services, recruiting and training staff, and building up a customer base. For example, a pharmaceutical company might want to choose between buying a biotechnology business and investing more in its own research and development operations.
Different industries also have their own rules of thumb that can be used to calculate a value of your business. For example, many retail businesses are valued as a multiple of turnover. Other common valuation methods are based on the number of customers, clicks, or the number of outlets. Industry rules of thumb like these are often used in sectors were buying and selling of businesses is common.
In summary, valuing your business and investments involves a number of considerations. What are your goals, constraints, risk levels, and alternatives? Plan ahead – the more time you have, the easier it will be to show your business in the best possible light. Sort out systems – strong management information and operating systems give the purchaser confidence that there won’t be any unpleasant surprises. Structure the transaction to maximize the price, process, and requirements. Consider issues like taxes, timing, and operations that can have an impact.
Dr. Bert Shlensky, president of Startup Connection, prides himself on his ability to define what is unique about each and every business. He works closely with individuals to develop a personalized approach that targets specific areas of concern and offers solutions based on his 40+ years of experience. His team of experts will address your particular needs while working to save you time and money.
The coronavirus crisis has caused a plethora of financial issues that businesses must now face. All of my clients are dealing with dilemmas concerning customers, credit, future sales, financing, planning cash flow, forecasting, etc. when it comes resolving financial stress.
For the most part, we still live in a world with an old system of small business financing. Most financing (including institutions like banks and the SBA) is based on antiquated businesses, such as manufacturing and retailing, where financing was handled mostly through asset loans, guaranteeing debt via family assets, and personal savings.
However, things are very different today. Most new businesses are service or technology-based, and require much less investment.
Many clients start the financing process by asking the age-old question, “How do I raise money?” That’s an outdated way to start and I believe it’s a mindset that needs to be changed in order to be more successful. For example, traditional style advisors often recommend raising as much money as possible. In contrast, I suggest minimizing to reduce costs and risk, keep equity, and avoid excessive financing charges.
Some of the biggest changes that need to take place involve utilizing alternative techniques to minimize financing needs and marketing opportunities to accelerate growth. I recommend a more comprehensive and flexible approach to the process which focuses on key issues like: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you?
Additionally, we live in an environment with low interest and inflation rates, and lots of capital to invest. The rest of this article will discuss financing suggestions that take into consideration new trends and current events. For example, the government has instituted $2 trillion of relief programs for salary, unemployment, and investment that must be considered.
Operational Financial Resources
The simplest source of funds is to reduce the need for funds through regular business tactics. This can be accomplished with strategies such as outsourcing, contracting services, utilizing sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have most potential to save cash:
Plan and manage inventory to maximize return: focus on the 80-20% rule that states: 80% of your sales will come from 20% of your products. Additionally, manage inventory and services for seasonal and market changes.
Consider direct shipping from your facilities or organizations like Amazon.
Minimize investment through strategies like renting or sharing. For example, warehouses, cooking facilities, and manufacturing can all be outsourced. One caution: doing things in your home will frequently result in long-term, operational, and legal issues.
If asked, suppliers are often willing to help a business with things like financing, holding inventory, reducing production times, and direct shipping.
Use services for internet management, warehousing, and programming.
Understand and minimize complexity. For example, there’s a big difference between selling a shoe (with various sizes, colors, widths, and styles) versus selling food products (which have a few ingredients that can made into a number of items.)
Analyze why you are really spending and what you will get from it.
If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
Expanding Marketing Efforts
Don’t wait for business to come to you, but consider the rule: you have to spend money to make money. Analytics, internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster:
A website and a simple marketing statement provide basic information for potential customers. These can be inexpensive through programming tools like WordPress.
Amazon is the fastest growing retailer in the country and controls about 30-50% of most internet sales. It is easy to set up and relatively inexpensive.
Paid search through organizations like Google and Facebook are underestimated. These options can be inexpensive and fast, and the results can be measured.
There is nothing as productive as Networking, Networking, Networking!
These tactics must be tested and measured. Kill or modify the ones that fail and expand the ones that succeed.
Non-traditional Sources of Capital
Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It’s becoming more popular as it allows small investors to back your business through organizations like Kickstarter.
While credit card interest can accrue (at a high rate) if not paid off right away, some credit cards do offer a 30-day free program, or zero interest (for sometimes up to 18 months) with a new account.
Bartering, alliances, and exchanges are viable methods to get both excellent services and save cash.
Community based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs who do not qualify for traditional commercial bank loans.
Traditional Sources of Capital
Equity from yourself, friends, and family. This is the amount of money you can put into the business on your own, and you don’t have to pay it back until you see profits. It may include sweat equity or contributed assets. It also provides other investors with more confidence in your commitment.
Outside equity has the same properties except it involves giving up at least some of your own equity in the company. It can come from a variety of places such as partners, venture capitalists, private equity dealers, private offerings, and private investors.
Traditional banks and loan institutions are focused on reducing risk and making certain they get paid back. These are usually asset-based loans or are combined with equity contributions.
Raising capital is a two-way street that requires honesty, understanding, and communication. Understand your needs and the risks involved in order to find the right type of investors.
Don’t overestimate your potential or what is needed to meet your goals.
Develop plans, measure results, and satisfy investor requirements.
Significant changes are occurring in financing. There will be more risk, more volatility, more uncertainty, and more focus on profit and cash flow. Thankfully, there are numerous tactics to manage these shifts. As these changes progress, consider including more alternative methods—especially cost reduction, analyzing goals and strategies, and focusing on the dynamics of the financing rather than just how much money you can raise.
Dr. Bert Shlensky has an MBA and a PhD from the Sloan School of Management at MIT. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients toward maximum sales and profit. For a free consultation, please visit www.startupconnections.net.
We all know that new strategies and technologies such as the internet, social media, Smartphones, and major online retailers are rapidly disrupting organizations. However, financing and the financial industry have been very slow to adapt. The purpose of this article is to recommend a number of tactics to take advantage of new (and sometimes disruptive) financing opportunities. At the Startup Connection (www.startupconnection.net), we believe that a very important (but often overlooked) opportunity is that operating and marketing processes should also be viewed as financing tools.
We still mostly live with an old world of small business financing. Most financing (including institutions like banks and the SBA) are based on antiquated businesses, such as manufacturing and retailing. In the old business model, you quit your job, built a building, bought inventory, hired lots of people, paid high interest rates, gave away lots of equity, and then waited 1-2 years to make any money. This was financed through asset loans, guaranteeing debt with family assets and your own savings.
Fortunately, the reality today is very different. Most new business are service or technology businesses, and they require much less investment. Another very important factor is that you can now quit your job much closer to actually starting the business.
The biggest changes may be finding marketing opportunities to accelerate growth and using techniques to minimize financing needs. At the Startup Connection, we recommend a more comprehensive and flexible approach to the process. This approach puts a slightly different perspective on key issues, such as: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you?
Many clients start the entrepreneurial process asking the age-old question, “How do I raise money?” I argue that is the old way to start, and this mindset needs to be changed to be more successful. Old style advisors often recommend raising as much money as possible. In contrast, I believe in minimizing to reduce costs and risk, and to keep equity and avoid excessive financing charges.
There are other new perspectives to financing your business. We live in an environment with low interest and inflation rates, and lots of capital to invest. This article identifies financing suggestions, organized into operational, marketing, new, and traditional methods.
Operational Financial Resources
The simplest source of funds is to reduce the need for funds through regular business tactics. This can be accomplished with strategies of outsourcing, contracting services, using sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have most potential to save cash:
Use services for internet management, warehousing, and programming,
Plan and manage inventory to maximize return: focus on the 80-20 % rule that 80 % of your sales will come from 20 % of your products. In addition, manage inventory and services for seasonal and market changes.
Minimize investment through strategies like renting or sharing. For example, warehouses, cooking facilities, and manufacturing can all be outsourced. One caution: doing things in of your home has long term, operational and frequently legal implications.
If asked, suppliers are frequently willing to help a business through things like financing, holding inventory, reducing production times, and shipping direct.
Consider direct shipping from your facilities, or organizations like Amazon.
Understand and minimize complexity. For example, there is a big difference between selling a shoe (with various sizes, colors, widths and styles) versus selling food products (that have a few ingredients that can made into a number of items.)
Analyze why you are really spending and what you will get from it.
If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
Expanding Marketing Efforts
Don’t wait for business to come to you but consider the rule: you have to spend money to make money. Analytics, internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster:
A website and simple marketing statement provides basic information for potential customers. These can be inexpensive through programming tools like WordPress.
Amazon is the fastest growing retailer in the country and controls about 30-50% of most category internet sales. It is easy to set up and relatively inexpensive.
Paid search through organizations like Google and Facebook are underestimated. These options can be inexpensive and fast, and the results can be measured.
There is nothing as productive as Networking, Networking, Networking!
These tactics need to be tested and measured. Kill or modify the ones that fail and expand the ones that succeed.
Non-traditional Sources of Financing
Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It consists of offering to small investors in your business, through organizations like KickStarter.
While credit card interest can accrue (at a high interest rate) if not paid off right away, some credit cards do offer a startup business a 30-day free program, or zero interest (for sometimes up to 18 months) with a new account.
Bartering, alliances and exchanges are viable methods to get both excellent services and save cash.
Community based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs who do not qualify for traditional commercial bank loans.
Traditional Sources of Financing
Equity from yourself, friends and family. This is the amount of money you can put into the business on your own, and you don’t have to pay it back until you see profits. It can come from a variety of forms and can include sweat equity and contributed assets. It also provides other investors with more confidence in your commitment
Outside equity had the same properties, except it involves giving up at least some equity in the company. It can come from a variety of places like partners, venture capitalists, private equity dealers, private offerings, and private investors.
Traditional banks and loan institutions are focused on reducing risk and making certain they get paid back. These are usually asset-based loans or combined with equity contributions.
Raising financing is a two-way street that requires honesty, understanding and communication. Understand your needs and risks to find the right kind and type of investors. Don’t overestimate your potential or what is needed to meet your goals. Develop plans, measure results, and satisfy investor requirements.
Dr. Bert Shlensky has an MBA and a PhD from the Sloan School of Management at MIT. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients towards maximum sales and profit. For a free consultation, please visit www.startupconnection.net.
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We all know that new strategies and technologies such as the internet, social media, Smartphones, and major online retailers are rapidly disrupting organizations. However, financing and the financial industry have been very slow to adapt. The purpose of this article is to recommend a number of tactics to take advantage of new (and sometimes disruptive) financing opportunities. At the Startup Connection (
Fortunately, the reality today is very different. Most new business are service or technology businesses, and they require much less investment. Another very important factor is that you can now quit your job much closer to actually starting the business.
Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It consists of offering to small investors in your business, through organizations like KickStarter.