Valuation Calculator

Reconciling seller-buyer valuation expectations

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.

Other Key observations

  • Holding all the other inputs constant;
    • the higher the IRR the higher the expected ROI and the required profit growth
    • the longer the investment horizon the higher the expected ROI and exit profit
  • By overvaluing the business; offering less equity ownership for a given amount of capital or for a given equity ownership seeking more capital, as the seller you will discourage investors. The investors will not only have to invest at a high PE multiple, but they would only attain their required ROI by selling at an equally high PE multiple - the realized ROI would be negatively affected if the exit PE is lower and/or profit growth underperforms
  • By undervaluing the business; offering more equity ownership for a given amount of capital or for a given equity ownership seeking less capital, as the seller you will not only be reducing your ROI, by giving it away to the investor, but also increasing the extent to which you stand to be diluted in subsequent rounds of funding

For more insights on how to use the same tool when using different valuation metrics (e.g. Enterprise value, Revenue, NAV) reach us on for a free consultation.