February 28, 2007

Valuation….It’s Important to Agree.

Determining a company’s valuation can be a sticky situation. An entrepreneur who has worked to create a company often has a higher valuation than what it may actually be. Be sure to consider the following areas when determining the valuation.

  • Management Team
  • Size of the Opportunity
  • Product or Service
  • Sales Channel
  • Stage of business
  • Other Factors (Competitive Advantage, Intellectual Property, etc.)

As you work with the entrepreneur to determine the real pre or post valuation of the company, remember you will be working with each other in the future. Bill Payne, entrepreneur-in-residence at the Kauffman foundation, provides the following advice. “Contentious negotiations on valuation create hard feelings that can last through the duration of the “marriage” and are really unnecessary…If the entrepreneur and the angel investors are both in the [$1-$2.5 million] range but separated by a significant number, split the difference and get on with building a company. If the company eventually sells for $50 million, everyone wins. If the company goes out of business, the original valuation was not important.”

Remember, it may be more important to show the management team you value the work they have done so far. By coming up with a fair valuation you can instill a desire for the management team to further prove themselves.

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