In return for their capital, investors target a certain return whose realization is heavily influenced by the purchase price. At the same time, sellers aim for high selling prices which translate to retaining ownership of a larger part of the business.
So how do investors evaluate investment options and would the negotiation process be less problematic if sellers understood the investors’ point of view?
Unanimously, screening of investment options is pegged on return (IRR being the most common measure) and investment time horizon. So as a seller, is there a way to translate investors’ IRR & time horizon requirements, into meaningful business operational data to assess if the business can meet the investors’ demands? Below is a simple but extremely powerful tool that does exactly that!
Using our Valuation Calculator, as a seller you get a good estimate of how investors’ IRR and investment time horizon requirements relate to expected business growth. From the deduced expected profit at the end of the investment horizon, you can derive expected revenue (by using a reasonable net profit margin) and test both numbers (revenue & profits) against your own business forecasts. A key assumption is investors will be able to exit their investment at least at a price to earnings (P/E) multiple equal to the purchase multiple.
For more insights on how to use the same tool when using different valuation metrics (e.g. Enterprise value, Revenue, NAV) reach us on firstname.lastname@example.org for a free consultation.