Dear Business Owners,

If you've ever watched a startup pitch on TV and thought, "How did they come up with that number?" you're not alone.

Picture this: Your revenue is growing, your team is scaling, and opportunities are rolling in.

Then one day, a potential investor asks: “What’s your business worth?”

Cue the awkward silence...

What is Valuation? 

Valuation is calculating your company’s current and future economic worth. 

Consider answering the question: “If someone wanted to buy your business today, what price tag would you put on it?”

But it’s also not just about numbers. It’s the story they tell about your business. It’s a reflection of:

1.  Financial Performance: Your revenues, profitability, and cash flow trends.

2. Tangible Assets: Equipment, real estate, and inventory.

3. Intangible Assets: Your brand, intellectual property, customer loyalty, and goodwill.

4. Market Position: Where you stand against competitors and industry benchmarks.

For scaling businesses, valuation is the ultimate performance metric.

Why Every Business Should Know Its Worth

Without understanding your worth, you might underprice yourself or leave millions on the table. It’s a non-negotiable for the following reasons: 

1. Decision Clarity

Scaling is a high-stakes game. 

Should you reinvest profits into hiring? 

Should you pursue international expansion?

 A well-calculated valuation gives you a decision-making lens.

Here’s an example to consider:

Should you invest $500K in new tech or hire three senior developers? 

With proper valuation metrics, one option might increase your company's worth by $2M, and the other by $5M. 

Reply with the right answer and I’ll send a free resource your way! 

2. Investor Attraction

Investors back businesses they can quantify. A well-documented valuation boosts your credibility and positions you as a growing business. 

3. Negotiation Power

Knowing your value positions you for optimal outcomes when discussing funding, partnerships, or potential sales.

4. Wealth Creation (my favorite!)

Building wealth isn’t just about revenue. It’s about creating an asset that holds long-term value. 

Valuation is the foundation of wealth creation. If you’re planning a profitable business exit with a high valuation, check out the roadmap in my last newsletter issue.

The Three Proven Methods of Valuation

Valuation isn’t a one-size-fits-all exercise. Different methods suit different types of businesses.

Here’s an overview of the three most commonly used approaches:

Additional Hybrid Method

Contingent Valuation: Combines elements from multiple methods (e.g., income and market-based) for industries where no single approach fits perfectly. 

Each method has strengths and limitations, and the choice depends on the business's characteristics, industry, and stage of development. Often, a combination is used to provide a more comprehensive valuation.

Additionally, the economic cycle also influences how investors value each business. 

During expectations of expansion cycles, valuations will be higher than during contraction cycles.

Here below is the investor framework: 

A Tale of Two Scale-ups

Scale-up 1: Growth at all costs

Imagine a telecom company with 40% annual growth for seven consecutive years, a successful IPO raising £17.5M, and a market valuation shooting from £60M to £350M in just five years. 

Sounds like a fairytale but this story doesn't have a happy ending.

The company collapsed two years after hitting that £350M peak. Completely. 

Shareholders lost everything, and banks barely recovered 50% of their loans. But, what went wrong?

The company was so focused on growth that it forgot to manage its working capital. It fell into the classic trap of overtrading, growing sales faster than its cash flow could support. 

Sure, they got a headstart but never made it to the finish line.

Scale-up 2: Slow and steady wins the exit

Now, in contrast, a MedTech company took a different approach. Their story isn't as flashy at first glance:

10 years of modest growth. Initial fundraising of just £780K. A later valuation of £23M. 

Not exactly headline-grabbing numbers but here's where it gets interesting.

Instead of chasing explosive growth, they focused on three key areas:

1. Innovation and brand building (because substance > hype)

2. Strict cash flow management 

3. Employee share schemes (because everyone loves a piece of the pie)

Today, they're not just surviving, they're thriving. They're profitable, respected in their industry, and preparing for a successful exit. So, what did we learn?

The Million-Dollar Lessons (literally!)

These stories teach us three crucial lessons about valuation and growth:

1. Controlled growth is the key: The telecom company's rapid growth was like trying to run a marathon at sprint speed. Sure, you might set some impressive lap times but you’ll also crash spectacularly.

2. Focus on the cash flow: The MedTech company understood this, keeping their financial health in check even when it meant slower growth.

3. Your team is the real MVP. The MedTech company's employee share scheme was generous and strategic. When your leadership team has skin in the game, they are not just employees but value creators.

Now you know it's not just about having an answer, it's about having the right answer, backed by the right method and practices.

The question isn't whether your business has value, it's whether you're measuring, managing, and maximizing it correctly.

Remember: In business, numbers tell stories. Make sure yours has a happy ending!

Until next week,
Matteo Turi, 
Your Personal CFO