Overvalued your business?
Why entrepreneurs overvalue their business when it comes time to sell
Almost all entrepreneurs overvalue their businesses, which can turn away many potential investors. One of the greatest reasons that entrepreneurs overvalue their companies is the emotional capital that has been invested throughout years of diligent work. In this sense, an element of Wishful thinking makes its way onto spreadsheets and other financial information. Most importantly, it is essential to separate the value of an idea from the value of a business. In addition, entrepreneurs must be careful with their choice of advisors, picking the right business valuation and maintaining the correct attitude during meetings with potential investors.
In order to avoid overvaluation, it is important to consider several key factors during a valuation. Firstly, an entrepreneur must be Critical with his or her own valuation, since, as many investors point out, entrepreneurs tend to overestimate the idea while underestimating the financial contributions required to grow and develop the business. As previously mentioned, emotional investment in the business also tends to come into play, which can be damaging. Secondly, entrepreneurs must be careful with pitching advisors who are overly complementary with their valuations; it is usually better to settle on an advisor who is more openly critical and offers potential ways to improve the pitch. The role of an advisor is also central because a good advisor can help to identify the right market and buyers for the business. A poor one, on the other hand, can lead a business to attract an inappropriate investor, resulting in a plenitude of future problems.
However, market-based valuations are not appropriate for all ventures; for instance, they are not suitable for valuing a small company. This is due to the fact that small businesses are not constantly valued by the market and suitable comparator stocks are usually unavailable. Although asset-based valuations are more appropriate in the case of small companies, cash-flow based valuations are even more accurate because they evaluate the business in terms of future stream of earnings that the shareholders can anticipate. The problem is that such approaches are complicated, especially since small businesses often have intangible assets such as intellectual property to begin with. As a result, valuations made at a star-up stage often turn out imprecise and subjective-more like a guess than a reality. Since most entrepreneurs will have an overly positive outlook on the future of their businesses anyway, the valuation can appear grossly overvalued to investors. As a result, entrepreneurs can appear inexperienced or unreasonable.
Initial meetings with investors can actually be used as an opportunity to improve the pitch, but many entrepreneurs mistakenly become overconfident after a couple of seemingly positive first meetings. It is important not to be deluded by positive reactions from potential buyers because in the beginning, they are simply out to obtain more information about the investment. Moreover, they are looking to present themselves in a good light; so, their positivity is not always indicative of a highly sellable pitch.
When it comes to finally securing a deal with an investor, an entrepreneur's overvaluation of his or her business can lead a potentially good deal to fall through. When an entrepreneur has perhaps performed incorrect business valuations and overestimated the future growth of the company, he or she can come to require too much of an investor. Even if the entrepreneurial idea is very interesting, a deal cannot be completed unless the entrepreneur's and the investor's estimated values of the enterprise are close together.
In today's world, where entrepreneurship is becoming an increasingly attractive idea and the whole business world is competing for the best new innovation, it is easy to become over-optimistic about one's idea. Moreover, years of emotional and financial investment in a start-up can lead entrepreneurs to think somewhat irrationally about the company they are looking to sell to an investor. To avoid the pitfalls related to overvaluing one's own business, it is essential to appoint the most appropriate advisor who can identify the right market for the product as well as choosing the most appropriate valuation strategy. This way, one can have a realistic picture of the business' financial future and thus be able to make fair deals with investors.