From an outsider’s perspective, I have always found the process of valuing to be fascinating. I have always enjoyed watching shows like Shark Tank where you have investors running through various calculations to create an offer, and you have entrepreneurs showcasing and defending the value of their company in hopes of finding a partnership at a fair price.
I recently went through a valuation process myself as I have been trying to determine whether or not to buy in to a local gym and become part owner. While I won’t share the details of this deal for confidentiality reasons, I still wanted to share my experience compared to some of the strategies brought up in the book Winning Angels by Davis Amis and Howard Stevenson. Luckily, I have made some connections and have had some qualified and experienced people advising me along this process. They helped me to understand what questions I needed to be asking and what information I needed to be looking at. Most of which consisted looking at various financial statements as well as determining exactly how the current owners viewed the future direction of the business. Ultimately, after going through some negotiations, I made the gut decision not to invest in ownership of this business at this time. Given the industry, it seems to make more sense for me to save that capital and invest in my own business and make it exactly what I want.
The chapter on valuing in Winning Angels provides various methods for calculating valuations and determining whether the numbers support a good deal or a bad one. Most of the methods seem to support early stage valuations in the $2-10 million range for a typical angel investment opportunity. While numbers are obviously very important in deciding to invest or not, the authors of the book also point out that the numbers aren’t always the deciding factor. I really liked their splurge on “the feel good factor.” Just because numbers seem to make sense, doesn’t mean that an investor feels great about the entrepreneur or the industry in which the business exists. On the flip side, some investors will make what some would consider bad/higher risk deals just because they believe in the entrepreneur and they want to be in good standing with the entrepreneur for future opportunities as well. What I really like about this topic though is that it tells you to trust your gut. Human instincts are an incredible thing, and I feel as though I have trusted my gut through my recent experience leading me to make the right decision.