Understanding Valuation Dynamics

Appraising a business isn't just about applying an EBITDA multiple and calling it a day. Each piece of the puzzle can materially affect the valuation. If you're doing FP&A advisory work, or serving as a Fractional CFO, clients will often benefit from a valuation model. The model doesn't need to be perfect, but it serves a couple of purposes: 𝟭) 𝗗𝘆𝗻𝗮𝗺𝗶𝗰 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗕𝗮𝘀𝗲𝗱 𝗼𝗻 𝗥𝗲𝗮𝗹 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 Instead of relying on a static, one-off valuation, an integrated 3-statement model allows you to automatically refresh the appraisal as actual financial results (income statement, balance sheet, and cash flow) evolve. The model will recalculate the company's value in real time as revenue, margins, working capital, or capex change. 𝟮) 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 𝗣𝗹𝗮𝗻𝗻𝗶𝗻𝗴 𝗮𝗻𝗱 𝗪𝗵𝗮𝘁 𝗜𝗳𝘀 When the valuation is tied to full financial statement forecasts, you can easily run "what if" scenarios: How does a price increase or cost savings initiative affect the valuation? What happens if growth slows? By integrating assumptions into the model, you can help a business owner understand how these decisions impact value. 𝗪𝗵𝗮𝘁'𝘀 𝗵𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴 𝗶𝗻 𝘁𝗵𝗶𝘀 𝗲𝘅𝗮𝗺𝗽𝗹𝗲? In this analysis, loosely based upon a real company (I’ve changed the figures and assumptions), I use both an NTM Revenue Multiple and an NTM EBITDA Multiple. NTM stands for next twelve months. That's why it's vital to have a 3-statement forecast model behind this analysis. For illustrative purposes, I weighted the two different approaches 50/50 to reduce reliance on a single method. However, it may be concerning that the gap between the indicated value of equity before adjustments ($31.5 million and $84.9 million) is so wide between the revenue and EBITDA multiples. This is why selecting the right market multiples and the right basis for the multiple matters so much. Rely on a questionable multiple or basis and you’ll end up be with a questionable valuation. The value may need to be adjusted for a control premium, recognizing that buyers often pay a premium to gain strategic decision-making power. The result: A marketable, controlling value of $83.2 million. 𝗪𝗵𝗲𝗻 𝘆𝗼𝘂'𝗿𝗲 𝗯𝘂𝗶𝗹𝗱𝗶𝗻𝗴 𝗱𝘆𝗻𝗮𝗺𝗶𝗰 𝗺𝗼𝗱𝗲𝗹𝘀 𝗮𝗻𝗱 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻𝘀 𝗳𝗼𝗿 𝗰𝗹𝗶𝗲𝗻𝘁𝘀, 𝗮𝗹𝘄𝗮𝘆𝘀 𝗿𝗲𝗺𝗲𝗺𝗯𝗲𝗿: (1) Different methodologies can lead to very different results. (2) Adjustments for control can move the needle dramatically. (3) A valuation isn't just a number. It’s a combination of judgement and assumptions. You can have two different Fractional CFOs who arrive at two different outcomes. That's why it's helpful to make integrated financial models flexible, so they can update and be adjusted with relative ease. These models help give business owners a reasonable basis for the worth of their companies. They deserve that.

Do you know what your construction business is really worth? Valuation isn't just about the numbers on your balance sheet—it's about the overall health and potential of your business. If you're thinking about selling, understanding these key components of valuation is crucial. First up is financial performance. Consistent revenue, strong profit margins, and positive cash flow are the foundation of your business's value. Buyers want to see a history of financial stability and growth. Recurring revenue is another major factor. Buyers love predictability, and a steady stream of income from long-term contracts or repeat clients can significantly boost your valuation. It reduces risk and ensures ongoing income after the sale. A strong client base is also critical. If your business relies on just a few clients, it's seen as risky. A diversified and loyal client base shows stability and makes your business more attractive to potential buyers. Operational efficiency plays a big role too. How well your business runs day-to-day—thanks to streamlined processes, well-documented SOPs, and effective management systems—can increase its value. Buyers will pay more for a business that doesn't rely heavily on the owner and runs smoothly. Then there's your market position and reputation. A strong brand known for quality, reliability, and service excellence can command a premium. Buyers are willing to pay more for a business with a solid market presence and a good name. Finally, think about growth potential. Buyers are interested in the future, not just the past. If your business has clear opportunities for growth—like expanding services or entering new markets—it will be worth more. A solid growth plan can significantly increase your valuation. Understanding what drives your business's value is the key to maximizing your return when you decide to sell.

#thursday4appraisers Your business valuation could be higher if you understand these three psychological triggers. As business valuation professionals, we focus on financials & metrics. And that’s good.  But after 15+ years, I’ve seen that exceptional valuations often hinge on investor psychology. Here are three psychological triggers I've seen consistently drive premium valuations: 1. 𝐓𝐡𝐞 "𝐒𝐥𝐞𝐞𝐩 𝐖𝐞𝐥𝐥" 𝐅𝐚𝐜𝐭𝐨𝐫 Investors are willing to pay premium multiples when they see evidence that the business operates as a well-oiled machine rather than revolving around a single personality. 🔹 𝐄𝐱𝐚𝐦𝐩𝐥𝐞: Wealth management firms with strong systems and processes get higher valuations. ✅ 𝐀𝐜𝐭𝐢𝐨𝐧: Help owners build SOPs and delegate key responsibilities. 2. 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐏𝐫𝐞𝐝𝐢𝐜𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐒𝐭𝐨𝐫𝐲𝐭𝐞𝐥𝐥𝐢𝐧𝐠 Buyers value stability as much as numbers. Subscription or AUM-based models feel safer. 🔹 𝐄𝐱𝐚𝐦𝐩𝐥𝐞: I’ve seen firms with the same revenue get different valuations based on how they position cash flow. ✅ 𝐀𝐜𝐭𝐢𝐨𝐧: Emphasize recurring revenue and long-term contracts. 3. 𝐓𝐡𝐞 𝐑𝐞𝐥𝐚𝐭𝐢𝐨𝐧𝐬𝐡𝐢𝐩 𝐓𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐄𝐯𝐢𝐝𝐞𝐧𝐜𝐞 Nothing scares buyers more than client flight risk. Businesses that can demonstrate high client retention consistently achieve premium valuations. Buyers avoid firms where clients are tied to a single person. 🔹 𝐄𝐱𝐚𝐦𝐩𝐥𝐞: Businesses with structured client management attract higher bids. ✅ 𝐀𝐜𝐭𝐢𝐨𝐧: Showcase team-driven client relationships and retention data. The art of valuation isn't just measuring what exists. It's helping owners position their businesses to trigger the right psychological responses in potential buyers. Have you seen these psychological factors in action? Drop your thoughts in the comments.

What exactly is “intrinsic value” and how does it differ from market value? Understanding this concepts is crucial for investors and individuals interested in financial analysis. Intrinsic value refers to the fundamental worth of an asset or investment. It represents the true value of an entity, irrespective of its market price. Unlike market value, which can fluctuate based on supply and demand dynamics, intrinsic value is determined by a thorough assessment of the asset's underlying characteristics. To calculate intrinsic value of a business, various factors are taken into consideration, such as the company's financial performance, growth potential, industry trends, and competitive advantage. These factors help analysts evaluate the long-term value of an investment beyond short-term market fluctuations. One significant difference between intrinsic value and market value is that intrinsic value focuses on the inherent worth of an asset, while market value reflects the price at which an asset can be bought or sold in the market. Market value is influenced by various external factors, including investor sentiment, economic conditions, and market trends. While market value can deviate from intrinsic value in the short term, over time, market forces tend to align market value with intrinsic value. This convergence is driven by factors such as investor rationality, efficient market hypothesis, and the law of one price. Investors often use intrinsic value as a guide to identify potential investment opportunities. If an asset is trading below its intrinsic value, it may be considered undervalued, presenting an opportunity for investors to buy the asset at a bargain price. Conversely, if an asset is trading above its intrinsic value, it may be overvalued, indicating a potential sell or shorting opportunity. In summary, understanding the concept of intrinsic value and its distinction from market value is essential for investors seeking to make informed investment decisions. By considering the underlying fundamentals of an asset, investors can better assess its true worth and identify potential opportunities in the market. So, next time you come across discussions about intrinsic value and market value, you'll have a better understanding of their meanings and implications. Valhil Advisors Jimmy Vallee

𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗶𝗻 𝗩𝗲𝗻𝘁𝘂𝗿𝗲 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗯𝘆 𝗟𝗼𝗻𝗱𝗼𝗻 𝗦𝗰𝗵𝗼𝗼𝗹 𝗼𝗳 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰𝘀 Valuation is critical for startups and investors alike in the venture capital ecosystem. Here are 6 essential elements from Valuation: VC Edition to master this process: 1️⃣ Unique Challenges of VC Valuation: Unlike traditional valuation, VC valuation emphasizes higher risks, potential rewards, and liquidity. Valuations are not just go/no-go decisions; they significantly impact deal structuring. 2️⃣ Common Approaches: Valuations often rely on methods like Discounted Cash Flow (DCF), Comparable Transactions, and the Venture Capital Method, each tailored to account for high uncertainty and future growth. 3️⃣ Venture Capital Method: This method focuses on estimating exit values, discounting cash flows using high discount rates (25-80%), and calculating pre-money and post-money valuations to determine equity stakes. 4️⃣ High Discount Rates Explained: VCs use high discount rates to compensate for illiquidity, add value through active involvement, and adjust for optimistic forecasts, ensuring realistic valuation adjustments. 5️⃣ Forecasting Exit Values: Predict the company’s value at exit using metrics like EBITDA, sales, or customer growth, applying relevant multiples from comparable companies. 6️⃣ Dynamic Factors: Variables like market conditions, entrepreneur optimism, and specific investor strategies influence valuation, highlighting the importance of tailored, scenario-based approaches.

A founder friend just sold their agency for 9x EBITDA. Your first thought? “Wait… what?” You run a similar business. Same revenue. Similar team. Maybe even better margins. So why is their valuation nearly double yours? Sometimes the answer isn’t inside the business. It’s outside. ▸ Their niche was in high demand. ▸ A roll-up had just started in their sector. ▸ A strategic buyer needed to move fast. 💡 That’s the hard truth about valuation: It’s not just about how good your business is. It’s about how aligned it is with current M&A tailwinds. Here are 3 external trends every founder should be watching: ■ Industry Consolidation PE roll-ups, aggregators, and ecosystem acquisitions drive urgency. → If buyers are actively consolidating your sector, strategic value spikes fast. ■ Capital Conditions Interest rates, dry powder, and lender risk appetite affect deal structure. → Lower rates = more leverage. → More leverage = more aggressive offers (for the right business). ■ Technology Shifts AI, cloud infra, regulatory changes—they reshape entire categories. → Are you riding the wave, or exposed to obsolescence? You don’t need to become a trend forecaster. But you do need to understand what’s happening around you. Because when the right buyer is shopping in your category… Valuation becomes a timing game. And the sellers who win? They’re already prepared. — → Want to know if your business is ready to ride the wave? 📥 Download our Sellability Checklist (link in first comment) #MandA #ExitStrategy #BusinessValuation #TechAcquisition #Founders #Entrepreneurship #TimingMatters #BusinessGrowth

Think you know what your company is truly worth? You *might* be wrong. Here's why: Even in this age of AI, there seems to be a growing misunderstanding in business valuations. Because most business owners think they know what their company is worth. But the truth is, they're usually wrong by 10-40%. Here's the formula killing exits everywhere: Revenue × Industry Multiple = Business Value Sounds logical, right? But when used incorrectly, it can cost founders fortunes. Because there are 3 key things they're missing: 1. Not All Revenue Is Created Equal Two businesses in the same industry, with identical revenue, can sell for wildly different prices. I recently spoke with a founder who learned this the hard way. His tech company showed impressive projected growth for the next five years. But his historical performance? Four years of flat revenue. He thought his business was worth $15 million. But buyers valued it at just $9 million. Which is a $6 million mistake, and one he could have avoided with the right valuation strategy years before trying to sell. 2. Size Matters A company with $1M EBITDA and one with $10M in the same industry have earned different multiples. Why? → Larger companies attract a deeper pool of buyers → They represent lower operational risk → They're easier to finance with debt Yet many unqualified valuators (and some business owners) still unknowingly apply a generic 4× multiple to businesses of any size. 3. Owner Dependency Destroys Value If your business can't operate without you, YOU are your business... ...and your valuation will plummet because of it. But a company with a strong management team that can operate smoothly without the founder? It commands a premium price compared to a business where the owner handles everything. Here's the uncomfortable truth: Two businesses with identical revenues can have wildly different exit outcomes. 1. The first prepares their business for a future exit, understanding the primary value drivers in their industry. 2. The other assumes a standard multiple and hopes for the best. Which path are you on? - P.S. Want to know what your business is really worth? We've helped founders add millions to their exit... and you could be next. Drop me a DM and let's chat about it.

There are no hacks to increasing business valuation. Sorry.😞 There are no magic reports, or techniques to use that require “no work”. 😢 But there are levers to pull—let’s call them value drivers.🔧 In the high-stakes game of business valuation, everyone's looking for an edge. But the real secret weapon isn't some complex financial model or obscure metric. It's understanding and optimizing your unique value drivers. Value drivers are those aspects of your business that have the biggest impact on its worth. They're different for every business, but some common ones include: 1. Customer diversity and loyalty 2. Intellectual property and proprietary technology 3. Market share and competitive positioning 4. Strength and depth of management team 5. Scalability of business model The key is to identify your specific value drivers, measure them accurately, and focus relentlessly on improving them. This means going beyond traditional financial metrics to capture the full picture of what makes your business valuable. For example, if customer loyalty is a key driver, are you tracking metrics like Net Promoter Score or customer lifetime value? If your team is a major asset, how are you measuring and improving their performance and engagement? Remember, potential buyers or investors aren't just buying your past performance – they're buying your future potential. Your value drivers are the best indicators of that potential. So, take a step back and really analyze what drives value in your business. Document these drivers thoroughly, create strategies to enhance them, and make them a central part of your business narrative. Because in the end, understanding and optimizing your value drivers isn't just about increasing your business's worth on paper. It's about building a stronger, more resilient business that's positioned for long-term success. https://lnkd.in/eYU4v5hm #yourbizyourinvestment

VCs don’t “calculate” your valuation. They negotiate it. So how do they decide what your startup is worth? Let’s break it down: ➤ 1. Comparable Hype: They look at what similar startups raised recently. Not by industry logic—but by trend logic. If an AI CRM raised $12M on $60M pre, and you’re building something similar? You might anchor near that—if your traction or founder pedigree holds up. ➤ 2. Founder Leverage: VCs don’t invest in “value.” They invest in momentum. → Do you have other offers on the table? → Did Sequoia or Lightspeed just take a meeting? → Are ex-Stripe engineers following you on Twitter? All of this impacts how “hot” you look. ➤ 3. Market Narrative: Your TAM doesn’t matter unless it fits a macro VC thesis. → Fintech is out? Tough luck. → Vertical AI for doctors? Now we’re talking. Your valuation goes up when your story matches the fund’s internal hype-cycle. ➤ 4. Metrics Last, Not First: Early-stage VCs won’t do a DCF. They ask: → Is this founder irrationally obsessed? → Can this go 100x if it works? → Do we look dumb if we pass? ➤ 5. Round Dynamics: Valuation = What the best investor on your cap table is willing to pay. Everyone else follows that lead. So what can you control? → Build traction that speaks for itself → Craft a story that hits hard → Engineer competition between funds → Be the founder they can’t ignore And remember: Valuation isn’t what your company is worth. It’s what you can convince someone to pay right now—before anything breaks or explodes. Want brutal clarity on your valuation, pitch, or round strategy? Skip years of wasted effort and stop making expensive mistakes. Get direct advice on your deck, fundraising, GTM, or founder challenges. Book a no-BS 1:1 call with me here: https://lnkd.in/gWV8DT56 💬 Drop your most burning question in the comments. ♻ Repost to help every founder stop lowballing themselves. 🔔 Follow Anshuman Sinha for more Startup insights. #Startups #Entrepreneurship #VentureCapital #AngelInvesting #Economy

Valuing businesses is different than valuing a rug. As much "science" as we put behind business valuations, it really is more of an art. Valuation experts (and non-experts, too) can look at the same SMB and come up with two different values. Ultimately, none of the experts give the "right" value. The value of an SMB is subjective to each potential buyer, and it can also be dynamic for the seller. Unlike most other assets that we buy, a business doesn't have a set purchase price. Unlike houses, cars, lawn furniture, televisions, computers, etc., where the value is relatively consistent throughout the market, the value of SMBs can vary greatly, even if they have similar track records. Acquiring a business is an investment. This means that the buyer is acquiring the future cash flow that the SMB will produce. Comparable transactions can generate a range within which we expect the value to fall. This is where the similarities between valuing a business and other assets stop because a business valuation must account for other factors. Potential risks (actual and perceived) that could disrupt the future cash flow can be factored in. Who the buyer is can change the value of the business. The business's future stability because of customer contracts (recurring revenue included) or a moat that limits competition can increase its value. These are just a few examples of factors that make business valuations dynamic. From the seller's point of view, we would think the value they will receive when selling their business would be static. However, sellers will accept different valuations depending on the deal structure or motivation. Let's say that I will buy your manufacturing business for $10M. You have $1M of long-term debt on the books. We agree to an asset transaction, and half the purchase price will be allocated to the business's tangible assets and the other half to intangible assets. Keeping things simple and only using federal taxes, under this structure based on our $10M valuation of your SMB, you would take home $6.15M. But what if we lowered the valuation to $8M and switched to a stock deal? Assuming I kept the long-term debt in place, your take-home for this structure would be $6.4M. So, is your manufacturing company a $10M business or an $8M business? Other factors, such as whom the seller would like to take over control, a seller wanting to enjoy a portion of the business's future cash flow, or a seller's willingness to remain with the business after closing, can all impact how the seller values their business. Unlike going into a rug store, where the price of the rug is static, we can see several factors that can swing the price at which a seller will sell her business to a buyer. This is why both parties need to be flexible when constructing a deal. Getting stuck on a specific value can ruin what could be a great transaction.