How to Value Your Business

How to Value Your Business
A Practical Guide for Investor Presentations
Do you know the true value of your business?
Business valuation is not just a number. It's a subtle instrument that requires a balance between the founder's expectations and the investor's prospects. Your internal valuation is likely based on:
Significant personal investments and resources
Current financial performance and turnover
Deep belief in the project's growth potential and future
However, for an investor, objective metrics, market multiples, and return on investment potential are crucial, not just your perspective.
In negotiations with investors, the valuation question becomes a central point, demanding an artful search for compromise. An overestimated valuation can deter a potential partner, leading them to competitors with more realistic offers. Conversely, an underestimated valuation will result in the loss of a significant portion of future income and a controlling stake that you could have avoided.
A successful deal is the result not only of an arithmetic coincidence of expectations but also a harmonious balance of interests. The investor's share in the company is determined not only by the proportion of their monetary contribution to the overall valuation but also by the parties' willingness to find a "golden mean" that considers the risks, prospects, and strategic goals of each participant in the process.
Your Roadmap to Successful Negotiations
Negotiating with investors is not just about bargaining, but a delicate art of finding common ground and creating a mutually beneficial partnership. Your goal is not only to secure funding but also to lay the foundation for long-term cooperation where the interests of both parties are considered. It's a process of compromise, where each side seeks its "golden mean."
01
Understand Valuation Methods
Understand how investors calculate company value and how your business can be assessed from different perspectives. This will help you speak the same language and anticipate their arguments.
02
Master Formulas and Approaches
Learn to apply proven calculations (DCF, multiples, venture methods). Knowledge of mathematics gives you confidence, and flexibility in its application allows you to find optimal scenarios.
03
Argue and Defend Your Valuation
Substantiate your valuation with facts, data, and a clear vision for the future. Be prepared for an active dialogue, defend your positions, but also demonstrate openness to finding compromise solutions and mutual benefit.
04
Strategically Distribute Equity
Determine a fair distribution of shares, considering not only the proportion of the investor's contribution to the valuation, but also the balance of interests, motivation, and control of both parties. This is key to a long-term successful deal and maintaining your commitment.
05
Find the Golden Mean
Seek scenarios where the investor receives an adequate return, and you retain operational control and a sufficient share for future rounds and team motivation. This may include staged investing, vesting conditions, or flexible options.
Successful negotiations are not about one side winning over the other, but about jointly creating a roadmap to shared success. Emphasize the synergy and growth potential you can achieve together, finding solutions that satisfy the key interests of all participants.
Who Will Benefit
Our roadmap is designed for those who seek successful investment attraction, understanding that it's not just a transaction, but an art of finding a mutually beneficial compromise between the founder's ambitions and the investor's expectations.
Aspiring Entrepreneurs
If you are preparing for your first investment round, it is crucial to avoid typical mistakes that can undermine trust or lead to loss of control. We will help you understand how investors approach valuation and teach you how to find a fair value that considers your potential and their risks.
Current Founders
When scaling a business and entering new markets, raising capital becomes a more complex process. We will show you how to effectively present a growing business, justify its value, and negotiate terms that will attract investment while maintaining team motivation and adequate control over the company.
Ambitious Entrepreneurs
To engage with investors as equals and negotiate from a position of strength, it's essential to deeply understand their logic and be able to defend your interests, all while finding the golden mean. You will learn to build partnerships where the investor's share is determined not only by their contribution but also by the overall balance of interests to create the most successful project possible.
The Three Pillars of Business Valuation and Starting a Dialogue with Investors
Assets
What you currently possess: equipment, real estate, intellectual property. This forms the basis for initial valuation, but isn't always the key factor for growth.
Revenues
What you earn: current profit, forecasts of future income, and growth potential. This aspect often becomes central to the dialogue about expected investor returns.
Market
How you compare to competitors, similar deals, and general trends in your niche. This helps define your uniqueness and place in the ecosystem.
These "three pillars" form the foundation for determining business value, but they are only a starting point. Valuation is not just a number, but a subject for negotiation where each party seeks a mutually acceptable compromise. An investor's share is not always directly proportional to their contribution; it also reflects strategic interests, risks, and the potential that each side perceives.
The choice of valuation method heavily depends on your business stage and serves as a tool in negotiations: for a startup without profit, a market approach can highlight growth potential, while for a mature business, an income approach will focus on stability and profitability. Understanding this balance is key to a successful deal and finding that "golden mean."
Asset-Based Approach: Valuing Real Assets
When to Use
Ideal for companies with a large volume of tangible assets — real estate, equipment, inventory. This approach provides a **reliable starting point for negotiations with investors**, as it focuses on tangible value, minimizing speculative valuations. It is especially suitable for small businesses at an early stage or for enterprises where the liquidation value of assets is important to the investor as a guarantee. **It is often used as a basis for determining a minimum value from which parties can proceed in the compromise process.**
Formula
Value = Assets - Liabilities
Practical Steps and Negotiation Nuances
Create a detailed balance sheet of all assets: When valuing, it's important not just to list assets, but to determine their real market value at the current moment, which may differ from their book value. This often becomes a **point of contention** between the founder and the investor, especially for outdated equipment or real estate requiring renovation.
Account for Intellectual Property (IP): Patents, trademarks, copyrights, and unique technologies can significantly increase a company's value. However, IP valuation is **one of the most subjective and complex parts of the process** and often requires the involvement of independent experts, which in itself can be a compromise solution between parties. An investor might insist on a more conservative valuation, while the founder will aim for the maximum.
Subtract all debts and liabilities: Beyond obvious loans and borrowings, it's important to consider potential or hidden liabilities (e.g., lawsuits, warranty obligations). **Investors thoroughly scrutinize this point**, as any hidden risks directly affect future profitability and their share. The founder must be prepared to justify and prove the absence of such liabilities, or the parties must find a compromise on their inclusion in the valuation model.
Calculation Example: Cafe in Berlin
Asset valuation is a fundamental starting point for determining business value and initiating dialogue with investors. The following example demonstrates a basic net asset calculation for a small cafe in Berlin, which serves as a basis for further negotiations on equity share and investment terms.
This table provides the investor with a clear understanding of your business's material foundation. However, the net value of €65,000 is merely a starting figure. During negotiations, the investor may offer their own valuation, taking into account growth potential, market conditions, competition, and risks. The founder, in turn, will advocate for their strategy, intangible assets (e.g., brand, customer loyalty), and future revenues. The goal is to find a compromise where the investor's share is not just proportional to their contribution to this valuation, but also reflects a balance of both parties' interests to ensure the project's successful development.
Income Approach: Focus on Profit
Business valuation is not just a mathematical calculation; it's a foundation for negotiations and finding a compromise between the founder and the investor. The income approach allows for assessing a company's value based on its future profitability, which is a key factor for any investor. However, the resulting figure is merely a starting point that requires flexibility and an understanding of both parties' interests for a successful deal.
1
1. Profit and Potential Analysis
Thoroughly examine historical financial statements (P&L, Cash Flow) for the past 3-5 years to understand current profitability. Forecast future revenues and profits for the next 3-5 years, considering market trends, the competitive environment, and the company's development plans. Investors will carefully evaluate the realism of these forecasts, and your ability to substantiate them will be a crucial element in negotiations.
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2. Risk Assessment and Capitalization Rate
Determine an appropriate capitalization rate. This rate reflects the investor's required return and the level of risk associated with your business. The higher the perceived risk (unstable market, inexperienced team, high competition), the higher the rate will be (often 10-20% for small and medium-sized businesses, but can be higher for startups). During negotiations, the investor may insist on a higher rate due to their concerns, while you will strive to lower it by emphasizing your advantages and risk minimization.
3
3. Valuation Calculation and Negotiation Subject
Apply the formula: Value = Profit / Capitalization Rate. This amount represents a first approximation of the company's value. However, it is not the final figure, but rather a subject for further negotiation. An investor may propose a discount for lack of control or state the need for additional investments, which will impact the final share.
Practical Case Example:
An online store shows stable annual profit of €100,000. The founder believes risks are moderate and proposes a capitalization rate of 12%, valuing the company at €833,333. The investor, seeing risks associated with high market competition, insists on an 18% rate, which lowers the valuation to €555,556. During negotiations, the parties may agree on 15%, resulting in a valuation of €666,667, and find a compromise on the investment amount and equity distribution, considering the investor's contribution not only in money but also expertise.
This approach emphasizes that an investor's share is formed not only proportionally to their contribution to the calculated value but also as a result of balancing interests, mutual concessions, and a strategic vision for the company's future. The success of a deal often depends on the parties' ability to find a "golden mean" that satisfies both.
Market Approach: Learning from Analogues and Finding Compromises
The market approach to business valuation, especially for startups, is based on comparing your company with similar businesses that have recently been sold or received investment. It provides a valuable reference point for initial negotiations, but the final valuation is always the result of a compromise between the founder's expectations and the investor's risk appetite.
Advantages of the Method as a Basis for Negotiation
Objective Basis: Uses data from real market transactions, adding weight to your negotiation position.
Understandable to Investors: Multipliers and comparisons with analogues are the language investors speak, facilitating dialogue.
Reflects Market Trends: Allows for current market dynamics, investment demand, and investor sentiment to be considered, forming adequate expectations.
Ideal for Startups: Often the most suitable method when a company lacks significant profit or assets for other valuation methods.
How to Find and Justify Analogues in Dialogue
Startup Platforms: Crunchbase, PitchBook, Dealroom — sources of information on funding rounds and exits.
Industry Reports: Provide average market multiples and trends that can be used.
Public M&A Deals: Information on acquisitions of similar companies can be used to justify multiples.
Expert Assessments and Networks: Opinions of consultants and venture capitalists can confirm or refute chosen analogues.
The selection and interpretation of analogues is always a subject of discussion. The founder will seek the most favorable comparisons, while the investor will seek the most conservative ones. The goal is to find a middle ground where both parties see fair value.
Example of a Compromise Valuation with a Multiplier:
Suppose your SaaS startup has an annual revenue of €150,000. As an analogue, you found a similar startup that was sold for €1,000,000 with revenue of €200,000, which gives a revenue multiplier of 5x (€1,000,000 / €200,000). According to this scenario, your company is valued at €750,000 (€150,000 * 5).
However, the investor may point out differences: perhaps the analogue had a higher growth rate, greater market potential, or a more mature team. The investor will propose applying a multiplier of 4x due to increased risks or a smaller market share. Thus, their valuation will be €600,000. In the negotiation process, the parties may agree on a multiplier of 4.5x, which will yield a valuation of €675,000. This is a classic example of compromise, where both reduce their initial expectations to reach a deal.
Multipliers – Your Reliable Valuation Tools
Multipliers are key tools for determining a preliminary business valuation. They allow for a quick and objective assessment of a company by comparing it to similar enterprises in the market. However, it's important to understand that the results obtained using them are merely a starting point for further negotiations with investors.
P/S (Price to Sales)
Price / Sales
Multiplier: 1-10x
Ideal for growing companies without profit, especially in e-commerce and SaaS, where the main focus is on revenue growth dynamics.
EV/EBITDA
Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization
Multiplier: 5-15x
Suitable for mature businesses with stable profits and significant assets, as it accounts for operational efficiency without the influence of capital structure.
P/E (Price to Earnings)
Price / Earnings
Multiplier: 10-30x (may vary)
Most relevant for stable, profitable companies with predictable cash flow. Reflects how much investors are willing to pay for each dollar of earnings.
During negotiations with an investor, these multipliers are used to establish an initial position. However, the final agreement on the investor's share and the overall business valuation is always a process of seeking compromise, where not only the mathematical proportion of contribution to valuation is considered, but also the strategic interests of both parties, risk, growth prospects, and the unique characteristics of your business.
For example, an investor might propose a lower multiplier, citing market risks, while the founder will insist on a higher one, based on the unique value and growth potential. Finding a "golden mean" often involves nuances such as additional investments in future stages, special management conditions, or protective mechanisms for the investor. The main goal is to find a balance that allows the deal to proceed and benefits the long-term development of the company.
This table demonstrates how your business compares to competitors based on key multipliers. These figures serve as a basis for arguing your valuation to an investor, but be prepared for the final investor stake to be the result of a dynamic negotiation process.
DCF: A Look into the Future and a Basis for Negotiations
The Discounted Cash Flow (DCF) method is a powerful tool for visionaries, allowing them to value a business based on its future financial flows, brought to today's value. However, it's not just a mathematical calculation, but a key element in the dialogue between founders and investors, where every variable can become a subject of negotiation.
1. Forecasting Cash Flows (CF)
Forecast free cash flows over a 5-10 year horizon, based on detailed and realistic growth assumptions. The key here is to strike a balance: founders are often optimistic, investors are conservative. A compromise is reached through in-depth analysis of the market, competitors, and internal capabilities, as well as stress-testing various scenarios.
2. Choosing the Discount Rate (WACC)
WACC (Weighted Average Cost of Capital) for startups typically ranges from 15-30% or more, reflecting high risks and the cost of capital raised. This is one of the most contentious points: investors insist on a higher rate (reflecting their risk and required return), while founders argue for a lower one. The agreed-upon rate directly impacts the final valuation.
3. Calculating Present Value (PV)
Use the formula: PV = CF / (1 + r)^n, where r is the discount rate, and n is the year. This stage is technical, but its results critically depend on previous assumptions. A detailed explanation of each parameter and transparency in calculations foster trust in negotiations.
4. Terminal Value (TV)
Estimate the value of the business beyond the forecast period (Terminal Value). This can be calculated using the Gordon Growth Model or based on multiples. Assumptions for TV (e.g., post-forecast growth rates or target multiples) are also areas of active negotiation, as they can constitute a significant portion of the business's total value.
DCF as a Tool for Negotiation and Compromise:
The DCF model is not just a calculator, but a common framework for dialogue. Investors and founders can use it to discuss:
Business Model Rationale: How realistic are the assumptions about growth and profitability?
Risk Level: How high should the discount rate be, considering the startup's unique risks?
Long-Term Prospects: What assumptions about "eternal" growth or exit potential are fair?
Effective negotiations involve not only defending one's position but also understanding the other side's arguments to arrive at a fair valuation that satisfies both parties and lays the foundation for a successful partnership.
DCF Calculation Example: Basis for Negotiation
With a discount rate of 15% and the addition of terminal value, the DCF calculation yields a valuation of €1,200,000.
This figure serves as a starting point for business valuation, but the true value of the deal and the equity distribution are formed during negotiations with the investor. Valuation is not just a mathematical formula, but a basis for dialogue where each party seeks to find an optimal balance of interests.
The investor's share is determined not only by the proportion of their contribution to the pre-money valuation but also by the parties' willingness to compromise, considering risks, strategic input, and the long-term goals of both the initiator and the investor. A successful deal is always about finding the "golden mean."
In a presentation, always defend your forecasts with facts: "Our growth is based on a 20% market increase last year — here is the supporting data." This will strengthen your negotiating position and help in forming a fair agreement that reflects various scenarios.
Equity Distribution: The Art of Compromise
Business valuation and agreements with investors are complex but critically important processes, where mathematical calculations serve only as a starting point. The real goal is to find a golden mean, balance the interests of all parties, and fairly "divide the pie" to create a solid foundation for a future partnership and a successful deal.
1
Determine pre-money valuation and start the dialogue
This is the company's value before receiving investments, and it often becomes the first point of negotiation. Founders see enormous potential and years of hard work, while investors assess risks, current performance, and market conditions. It's important to justify your valuation with facts and forecasts, but be ready for constructive dialogue and finding a common, realistic figure.
2
Calculate the investor's share as a starting point
The formula "Share = Investment / (Pre-money + Investment)" provides a basic understanding. However, this share is not fixed. It can be adjusted depending on the investor's strategic value (experience, connections), their willingness to take on additional risks, or the need to retain a larger stake for founders for motivation and control. Consider potential dilution in subsequent funding rounds.
3
Implement vesting for long-term motivation
Vesting is a mechanism for the gradual acquisition of shares by the founding team and key employees over a specified period (usually 3-4 years). This not only motivates the team to stay with the project and achieve results but also protects the investor's interests, guaranteeing the commitment of key individuals to the company's success. Discussing vesting terms is an important part of the negotiation process.
4
Consider deal structure and protective mechanisms
In addition to direct equity purchase, investors may offer other instruments, such as convertible notes or SAFEs, which defer valuation to the future. It's also important to discuss protective mechanisms, such as the investor's veto rights on key decisions, anti-dilution provisions for founders, and terms for board participation.
5
Seek the "golden mean" for a successful partnership
Negotiations are not a battle for every percentage, but a search for a mutually beneficial solution. Scenarios for successful deals often include: 
Strategic Investor: Founders agree to a slightly smaller share in exchange for invaluable experience and connections that will accelerate the company's growth.
Flexible Valuation: Parties agree on phased financing with re-evaluation at each stage, which reduces risks and allows the investor to see progress.
Risk Sharing: The investor is willing to provide a larger sum but requests additional guarantees or special profit distribution terms in the initial years.
Remember, the goal is not just to close the deal, but to build a long-term, productive partnership where the interests of all parties are maximally balanced.
Equity Balance: From Calculations to Compromises
Equity distribution is not just about mathematics, but also the art of negotiation. Let's consider a basic scenario and the factors that influence the final agreement.
83%
Founder's Share
Maintaining control and team motivation for long-term development.
17%
Investor's Share
Fair compensation for an investment of 200,000 €.
Basic Scenario Calculation: 
Pre-money Valuation: 1,000,000 € 
Investment: 200,000 € 
Post-money Valuation (Pre-money + Investment) = 1,200,000 € 
Investor's Share = Investment / Post-money Valuation = 200,000 / 1,200,000 = 16.67% (rounded to 17%)
This calculation is just a starting point. The actual equity distribution is formed through negotiations, where each party strives to find an optimal balance of interests.
1
Value for the Investor
An investor can bring not only money, but also expertise, connections, and strategic development. This can be an argument for revising the equity share.
2
Founder's Contribution
How significant is the founders' "sweat equity" (invested effort and time)? A clear justification of past achievements and future commitments.
3
Market Conditions and Alternatives
The presence of other potential investors or the uniqueness of the project can give founders leverage in negotiations.
Negotiation Scenarios: Finding the Golden Mean
Example 1: Investor with High Expertise
The investor offers 200,000 € and is ready to actively participate in operational management, which will significantly accelerate growth. The founders may agree to a 20% investor share, recognizing their strategic contribution, even if calculations suggested 17%.
Example 2: Justifying a Larger Founder's Share
The founders demonstrate that their previous investments (e.g., 2 years of relentless work without salary) are equivalent to an additional 300,000 € in pre-money valuation. This could allow them to retain an 85% share for the same 200,000 € investment, reducing the investor's share to 15%.
Example 3: Compromise Structure
Instead of increasing the investor's share, the parties agree on additional conditions: the investor receives a right of first refusal for the next funding round or bonus shares upon achieving key metrics.
Each case is unique, and a successful deal depends on transparency, mutual respect, and a willingness to compromise. The goal is not just to sell equity, but to find a partner who will strengthen the project.
Your Next Step to Success: The Art of Negotiation and Compromise
Now, armed with in-depth knowledge of business valuation methods, you are ready for the most crucial stage — negotiations with investors. Remember that finding the ideal valuation and equity stake is not just a mathematical calculation, but a subtle process of finding a compromise between parties, where the balance of interests between the initiator and the investor is crucial.
01
Thoroughly Analyze Your Business
Dive deep into financial data, market prospects, and growth potential. Identify key value drivers and strengths of your business model to confidently present your position.
02
Calculate 2-3 Valuation Scenarios
Use various approaches (DCF, comparative analysis, venture capital method) to obtain a realistic valuation range. These calculations will serve as your starting point for discussion, not a rigid ultimatum.
03
Prepare a Convincing Argumentation
For each calculation, develop a clear and logical justification. Be prepared to explain why your business is worth that much, but also be open to investor arguments and finding common ground.
04
Negotiation Mastery: Find the Golden Mean
Remember: valuation is a negotiation tool, not a fixed number. The investor's stake is determined not only by the proportion of their contribution to the current valuation, but also by strategic vision, risk distribution, and future contributions from both sides. 

Be prepared to discuss various scenarios: perhaps the investor will offer a smaller stake for a larger investment, or you can exchange part of the equity for strategic expertise. Seek a mutually beneficial solution that ensures motivation and control for you, and fair compensation for risks for the investor.
Successful Negotiations and Prosperity to Your Business!
May your business soar to new heights with the right investors, fair valuation, and a strong partnership based on mutual understanding and compromise.