Many accountants that we speak to get lots of their clients coming to them with a new idea and are seeking to put together cash flows and business plans.
The best advice you can give to a client like this is to ask them one simple but very effective question.
What have you done to protect your idea?
If they have done nothing, then all the financial calculations in the world will come to nothing if their idea is stolen away from them…or if someone else does it first.
Ask them to contact us and we will protect their idea for just £65 within a few days. We can also show them how to get legal expenses insurance so that if someone does “steal” their idea they will have a legal war chest to fight them in the courts…..if it ever came to that.
Below are some other questions from accountants
Q: How do I place a value on my company’s Copyright or intellectual property?
A: In reality, valuing a business is much more of an art than a science. The most widely accepted value will be defined by how reasonable the figure is relative to the assumptions used in the analysis.
Most financial professionals will admit there’s as much qualitative input as there is quantitative number-crunching when it comes to performing valuations. Even when two valuators do agree on the methodology, they may vary on the assumptions used in that model and then arrive at very different values for the firm. So it requires a blend of pro forma cash flows, tangible assets, financial and industry ratios, earnings multiples and a wide range of “comps,” all shaded by investor sentiment, personal gut feeling and a healthy dose of reasonableness.
Let’s look at two perspectives in the context of one of our recent deals. A newly launched design, manufacturing and distribution company had fewer than 30 employees and had never done more than £425,000 in sales in any of its first three years. However, the business began to book a steady stream of new contracts for OEM custom component parts, and applications systems and devices to keep company operations running strong over the next few years.
Based on the recent flurry of new potential sales, the growth curve was plotted for the next four years, and it was somewhere in the range of 20 percent per quarter. In order to support this ramped-up scale, the facilities, IT capabilities, personnel and communications systems needed significant upgrades of around £1.2 million. A partnership of two angel investors and a smaller venture capital firm were approached, and within two weeks, they showed interest in funding the deal through an equity stake.
The potential investors hired a private firm to do a valuation, and we performed a competing valuation for our client. Later, we met at the negotiating table to talk about the industry prospects, the entrepreneurs and key management team’s background, the company’s innovative, Copyright and patented new designs, and the overall sales prospects. When we sat down, we were separated by a factor of more than 30 percent. (Our value was 30 percent higher than their value.) To further complicate things, our client already thought that my value was less than half of what it should be.
Valuation can be derived from any combination of the following models:
- Net assets after all debts are excluded
- Net liquidation at fair market pricing
- Replacement costs at existing market levels
- Adjusted goodwill on excess earnings
- Recent comparable sale price
- Comparable public company price
- Comparable price-earnings multiple
- Present value of after-tax cash flow
- Value of patents and other IP
We prefer to start with the discounted present value of the after-tax cash flow and compare that to recent sales of similar firms. Then I look at the market capitalisation of similar publicly traded firms and similar industry PE multiples. The combination of these three should be reasonable and make sense for both parties. But one of our close business associates has often said, “The correct valuation is the one the capital provider will agree to.”
Be sure the valuation passes the critical test of reasonableness. Does the value accurately reflect the company, industry-risks and expected returns for the future? Whatever you come up with determines how much equity you’ll relinquish to the funding group and how much stock you’ll have left for subsequent rounds of growth capital in the future. Strong sales and profit results in the next few months will strengthen my position on the value of the company described in the example above during future deal talks. Poor performance in the coming months will make my value appear far too optimistic. Concessions on valuation might be necessary to keep forward momentum in your operations, but in the end, make sure the final value truly makes sense.