Intangible capital is directly related to the company’s valuation, as the company can accelerate its valuation. Ultimately, the company’s wealth exceeds the sum of its accounting assets and is measured by the quality of the intangible assets.
When entrepreneurs or business leaders seek funds to develop their business, they find it difficult to value the company. The many parameters to be taken into account are not only related to financing and other mathematics. Therefore, a company’s book value does not summarize its overall value.
Various valuation methods in use
Several valuation methods can be used. Most are suitable for companies with history, real income, and multiple balance sheets. But these are ineffective in analyzing (admittedly promising) startups and are therefore not yet really proven.
The “Thesaurus” method
This method consists of a benchmark for measuring intangible capital and extra-financial value’s financial value. It was developed at the French Ministry of Finance, Economic and Industry’s request. Therefore, its main mission is to create a relationship between balance sheet assets and cash flow generation. The repository was built on a solid foundation that aims to reconcile:
- The overall asset value measure.
- The measure of the value of corporate returns is commonly calculated using the discounted future cash flow method.
- And the book value of the company.
The Thesaurus method allows companies to explore components that do not count. Among them, we find in particular the company’s customers and partners. It is true that a long-term clientele and motivated, creative and efficient employees bring a lot to the company and therefore represent a certain value. Two measurements are then possible with this method:
- Discounted future cash flows = enterprise value.
- Future cash flows that can be generated with current assets = enterprise value.
- The workload for the appraiser will vary according to the approach chosen. The discounted total of future earnings must be calculated in the first example. For the second, it will be necessary to analyze the condition of all assets and deduce their capacity to generate profits.
The discounted cash flow method (DCF)
In financial analysis, the company’s valuation is defined as the discounted sum of the cash flows that could be generated in the future. The method that allows this calculation is called DCF and is a more complex study than EBE but pursues the same objective.
Financial forecasts for new companies are rarely fulfilled. The spreadsheets are too far from reality. Therefore, this method should not be used as a valuation method but as a promise of profitability in case of success.
The “comparables” method
Companies can rely on identical transactions carried out to appreciate a value. In reality, the market fixes the amounts. Suppose a startup of the same size and operating in the same industry as another can raise two million. In that case, the latter is also able to do so. And knowing that it has raised this amount gives no further information about the percentage of the capital thus sold. However, a startup often has no comparable figures and no equivalent in the market.
How to promote the company?
All these methods do not necessarily apply to first fundraising. But it is always possible to base it on a capital requirement and the dilution limit. Normally, arbitrage takes the initiative. While the business leader will tend to overvalue your company, internal or external advisors may revise this valuation downward. It is better to identify the number of customers that can be convinced and then assess the turnover they represent.
Choose the right method
Thus, all the variables taken into account are not only economical, since the quality of the clientele, the skills of the teams, and the subscribers can also constitute a value for the companies. Therefore, it is a question of assessing the company’s value in terms of the quality of its intangible capital.
The equity method defines the value of a company mainly in terms of its assets (machines, real estate, patents, technologies, etc.). Thus, a young company with no balance sheets and no physical assets by definition escapes such an analysis. Considering intangible assets is necessary to value the company (quality of equipment, commercial agreements, etc.). As a reminder, the value of assets does not correspond to the market value. Therefore, the strategy will be decisive in the analysis and valuation of the company. The first step is to break down intangible capital and establish the different assets involved in the value creation process:
- Human capital: Formed by the qualities of the company’s employees (skills, know-how, motivation, involvement in the company);
- Customer capital: Consists of the quality of the relationships maintained with customers and the presence of loyal customers (solvency and profitability).
- Knowledge capital: Consists of the patents, the company’s trade secrets, and the Research and Development.
- Brand capital: Corresponds to the reputation, uniqueness, and notoriety of the company and its products and services.
- Supplier capital: Based on relationships with suppliers and distribution networks.
- Organizational capital includes safety, quality policy, distribution network, and company control process.
- The information system: Consists of ergonomics, costs, commercial coverage, and reliability of the systems.
All these elements constitute the company’s capacity to generate profits. Therefore, they are not necessarily included in the balance sheet, but they certainly contribute to the company’s profitability, especially in the long term. Therefore, to develop a business and make it gain value, the business manager must concentrate his efforts on these different points.
Surround yourself with quality investors
Fundraising requires a lot of resources from businesses. Therefore, it is preferable not to use it too often. It is in the direction of the market that the entrepreneur should concentrate on. This is how the importance of short-, medium- and long-term strategies takes on their full meaning. Fundraising can fill several stages. Both turnover and debt make it possible not to dissolve it too quickly. As a result, the essence of innovation must be linked to these few concepts. Depending on the positioning of the companies, the speed of access to their target market will be a fundamental factor.
According to Fluency Gold company, which is also in the education business and has its own essay fixer, claims that the dilution threshold for companies varies widely but is between 20 and 30%. Once the value of need has been assessed, and the post-money value has been established, the company has useful data, but it is only a simple baseline. Investors are preparing to take risks and will not fail to raise uncertainties or inconsistencies surrounding the project in question. Thus begins the negotiation process.
Negotiations: clarifying objectives
Companies need to clarify their objectives with investors: does the manager want to develop it in the long term or sell it? The choice of partners is fundamental. The ideal situation is to have partners who can provide finances, guidance, relationships, and a certain amount of commercial potential. The attitude adopted by the commercial or entrepreneurial manager is particularly evocative of his strengths and weaknesses. Time and the number of available interlocutors are an asset to be stronger.
When a company is confronted with only one interlocutor, it is in a weak position because they are the ones who have a need. The latter will have no difficulty in establishing its conditions. Finally, the investor will be more inclined to follow the entrepreneur who knows how to sell his products and services and if he has a clear vision of his objectives. Being collective in this type of negotiation can also pay off. The qualities of the team assembled by the manager increase his credibility and increase his chances of success. Employees’ abilities and traits provide value to the firm.
An established position
Having several customers ready to buy and a good position in the target market allows you to benefit from a good base. In the same vein, being followed on social networks and see the number of subscribers soar allows you to gain credibility and value for the company. Reality makes it easier to extrapolate than a purely theoretical presentation.
Likewise, suppose an investor or a specialized fund places its trust in the company. In that case, the chances of success will increase considerably. Thus, the support of public or private banks, local or regional players, and influential sponsors who trust the manager and his company can greatly impact the investors’ decisions. Competitions and rewards also make it possible to build a substantial dossier around the project. There is only one way to go to build strong relationships of trust with investors: to exceed targets and explode forecasts.
External services
External consultants can help companies to prepare and carry out their fundraising. Still, it should be noted that they can expect commissions for fundraising and the price of the service.
In addition, there are crowdfunding platforms that offer companies to raise funds in different investor communities for them. Some charge file analysis fees, while others apply commissions on the amount raised in case of success.
To conclude
Valuing a company is a delicate exercise. Between balance sheets, income statements, annexes, the vision is partial and the valuation incomplete. The latter is based mainly on the intangible capital of the company. This analysis method provides a more complete basis for study than the other methods and more in-depth analysis tools. The entire value creation process must be considered to properly value a company.
Intangible capital is a reliable basis of analysis that can be more than interesting to work on, especially for young companies such as startups.