5 Key Steps on How to Value a Business

Hey everyone, Akeel Jabbar here again from Horizon Capital and SaaS District. Today I want to talk about 5 tips and strategies which you can look at and how to invest and value a business. So if you're considering looking to invest in a business, these are some 5 frameworks I recommend to look at in terms of how to understand to come up with a valuation. Number 1, the first thing is understanding the business. This is a point where you're looking at the business objectively without any opinion and just gathering facts. So the first thing you want to do is just gather all the operational metrics and paint a picture of what the company actually is. So let's say you're looking at a SaaS business. You're looking at numbers such as churn. What is the lifetime value of the company? How many customers do they have? How quickly are they growing? Understand the management and team strength. Try to interview the staff members and really dig in to just listen and hear what they're telling you. Okay, we like to use the McKinsey framework. I don't know if you're familiar with that, but I highly suggest You guys check out the book. I'll link to it into the show notes. That gives you a nice framework on how to approach the hypothesis and gather facts. Number 2, understand the market. Is this a growing market? Is this a dying market? How big is the market? Is this local to a specific area? Is there only room for, you know, 1,000 clients, 100 clients, or is it 10 million clients that you can work with? Okay. That's what you need to understand is how big is this market? How competitive is the market? Is there already hundreds, or if not thousands, different players in the space? And then finally, what is the barrier to entry? How easy is it for someone to just come in and copy what you're doing? Do I just need a mic and a laptop to get started, or do I need a full-on, you know, R&D team, a patent, and a lot of kind of difficult technical features that make it difficult for someone else to replicate? Are you going to be competing with the competitors or are you looking to get acquired? So are you competing with the big guys? Is there a few big guys that you want to go head to head with and try to compete with and grow with? Or are you just looking to kind of grow big enough so that you can get their attention and get acquired? Number 3, adding to number 2 is understanding your competition. So look, this is where you get detailed into researching what your competitors are doing. Okay, what are the features they have? What are the price points? What are their operational metrics? Do you know how fast they're growing? How, how big are they? You know, what are the— what is the size of their business? What's their pricing model? These are all things that you want to start looking deep into to understand it. There's a couple of tools I suggest here that you want to look at that you can use yourself, such as Owler. owler.com is a really good one. SpyFu. SpyFu.com is good to understand their analytics and their SEO and marketing strategy. MergerMarket, or even PitchBook. So those are 4 really good tools I'll put in the show notes to help you guys analyze your competition. Number 4, understanding your financials. This is probably the most important part, obviously, is this will teach you on how the company is actually performing and tracking in terms of performance. You want to look at different trends, and based off of that, you want to look at— find what are the important numbers that you want to look at and track. Revenue is not the only important part here. What's more important is actually EBITDA, cash flow, and seller discretionary earnings. So once you calculate those numbers, which you can do yourself or hire an accountant to figure out, that'll give you a good trend of how the business is doing over time, and then understand the real picture where the financials will be once you decide to invest in the business. Finally, number 5, understanding the valuation multiple. We use several techniques to come up with the actual value of what the company is worth in terms of dollar amount. The technique that we recommend is using the discount— discounted cash flow method. And what that does is it gives you— what you want to do is come up with a multiple based on the, the cash flow or the EBITDA value which you calculated in the last step. And what that does is this method gives you a way to negotiate and come up with a price with the seller. Now this price is just determined based— could be based on revenue, it could be based on EBITDA, or it could be based on cash flow. This depends really up to you. But just remember, at the end of the day, the decision on price and what you think it's worth is between you as a buyer or investor and the seller. But what this framework is supposed to help you with is come up with a starting point and a negotiating point to understand what the company is worth. At the end of the day, this is a guideline. We hope it helps you in determining the right value of the company. Do your research, understand the business, understand the financials. Based off of that, you can decide whether it's worth a lot or is it not worth as much as you thought it was. And hopefully at the end of the day, you make the right decision and it's the right price Which you bought it for. Alright, thank you guys. Hope that was helpful. If it was, please comment below and make sure to subscribe for our next videos.