Business Valuation, Receiving Offers

Dave Harries:

How do you value a business, particularly how do Venture Capitalists value a business?

Neil Ackroyd:

Right well,how do you value a business, Venture Capitalists value the business generally speaking in the smaller end of the mid-market, so in the £5-50m valuation range it is quite formulaic. They will value a business based on their feeling of the comparable multiplies, what businesses in that market trade for and typically when you are buying a business you try and pay as little as possible don't you? But ultimately the decision of whether to do the deal or not and the valuation will be based on a detailed modelling exercise and it really comes back to how much money a VC wants to make. So the VC or Private Equity organisation typically looks to make 30% internal rate of return which really means they are going to double their money in 2/3 years and then it is just a calculation. We have number of models, we actually have a Keep It Simple model (KIS) which is a 1 page spreadsheet where you can pump in the variables or how much debt you get into the business or what the financial leverage is but ultimately the spit out number at the bottom is this 30-33% IRR which the VCs (Venture Capitalists) are looking to get and if based on a load of assumptions on how the business is going to grow and what they are going to sell it for in 4/5 years time spits out that return and they can give the management a stake so that the management are very incentivised to make a lot of money for themselves then they are happy to do the deal. So the valuation is slightly different to a trade buyer because a trade buyer will have other things to bolt this into they will have save costs and increased the profits themselves. The VC looks at it as a standalone business and then a load of financial engineering and they try and calculate their own return and management equity stake and come up with a valuation. It is slightly more complicated and also slightly simpler.