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How to Use Comparables to Determine Your Company's Valuation When Raising Money

How to Use Comparables to Determine Your Company’s Valuation When Raising Money | Ep 98

How to Use Comparables to Determine Your Company’s Valuation When Raising Money | Ep 98

How to Use Comparables to Determine Your Company’s Valuation When Raising Money | Ep 98

Summary

One of the major terms entrepreneurs face when raising money for their business is valuation. 

The key to success in getting the valuation you want is having a defensible number. You can get this by building comparables and in this episode I lay out how to build comparables (comps) using a free site an excel.

If you’re raising or thinking about raising money for your company you’ll want to listen to this episode. I’ve use this approach to get a good valuation for my past companies and used it when I was a venture capitalist to negotiate valuation with founders.

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More Information on Build a Business Success Secrets

Hello, friends. Welcome to the show today. We’re talking about how to use comparables to figure out your company’s valuation when you’re looking to raise money. Here we go. Welcome to build the business success secrets. The only podcast that provides straight talk for entrepreneurs. Whether you’re an entrepreneur, starting with an idea or growing your business, this show is for you.

We’ll teach you how to build a strong mindset, powerful body and profitable business so you can achieve success. And here’s your host, Brandon. See white when you’re going to raise money for your business. One of the major terms and things that you’re going to need to know or determine is your company evaluation. And there’s a bunch of ways to do this. If you’re in early stage company, there’s sort of an approach growing company and then very large companies.

There’s mathematical formulas. What we’re talking about today is if you are a small to medium size business under $100 million in revenue and how you can figure out what your evaluation is, and one of the tools that I have been using for years and has a wealth of information at your fingertips is Yahoo Finance.

What we’re going to do is we’re gonna go to Yahoo and Yahoo is going to give us a bunch of statistics about public companies that we can use to build a comparable chart we’re going to take. Several companies were going to take some statistics, and then from there we’re going to look at them and see how much money they make, what their margins are, and, as importantly, what their price to sales metric is or ratio. So let’s walk through this first thing I want you to do if you’re driving or you’re not at your computer. When you’re listening to this, you can play it back. But it’s pretty easy. Go to finance dot yahoo dot com that’s going to bring you to the Yahoo Finance site. And from there, let’s use Tesla as example so you’ll go there and you can either type in Tesla or you can type in the ticker, which is T. S L. A.

When you get there is going to bring up a summary page, and there’s going to be a bunch of of options for you to select. I want you to hit statistics and when you hit statistics, there’s going to be valuation measures as the first table, and this is going to give us a ton of information about Tessa. It’s going to tell us their market cap, and I’m looking at this right now. Currently, their market cap is 586.75 billion. Their enterprise value is about 5 80 you can look up enterprise value.

We’re not going to cover that today, but as I go down the list, what I want you to look at is the price to sales ratio. And basically it is trading at 20.99 times, so it trades at 20.99 or 21 times sales. And that’s what we’re looking at. And what we can do is we can build a chart with companies like that in our industry and start to get an idea how they’re being valued. And as a private company, we’re probably going to take a discount because as a public company, their money is liquid, so they, they’re investors, can get liquid at any time. They can sell their stock in a private company. That’s much harder.

So you’re going to have to discount yourself from what a public company, and especially a company like Tesla that has tons of sales and everything like that. If you scroll down lower on that page, you’ll also be able to find their profit margin. Tesla’s profit margin right now is 2.29%. They’re operating margins 6.19 and then you’re gonna see a whole bunch of other stuff that revenues 31.5 billion.

You know, everybody is 4.27 Their net is 690 million, and then you’ll see that they have 19.338 billion on their balance sheet. I know these are big numbers, but it doesn’t matter. They can translate into our business. Let me walk you through another example. I pulled up an old sheet of a clothing company that my brother and I were building and actually still existed just on a smaller scale. It was called lateral line, or is called lateral line, and we were going to raise money for it, and what we did is we built a whole comparable chart and you can do this in excel really easily. We in one column put the company, then we another column.

We put all the tickers. We put the stock price, their market cap, their revenue there, multiple of revenue, which we just talked about their operating margin in their profit margin. And those were the Those are the columns of which we built in. And you can get that data really easily like I just described to you by going to finance dot yahoo dot com or Yahoo Finance, however you want to get there and it will give you all this information. And in our case, we were looking at clothing companies.

So at the time we looked at Columbia Sportswear Iconix Brand, J. Crew, Lululemon, Nike, Timberline, True True Religion, which was a jeans company that I believe was taken private or since gone private and then under armour. And what we did is we filled in this chart, and what we saw was the multiple of revenue was anywhere for Colombia, which is a huge company with pretty small profit margins at 55% at the time, and they were trading at 1.3 times sales.

The largest one was a comics brand, which was 4.9. Lululemon at the time was trading at 5.6. I think they trade a little bit higher now because they’re growing under armour at the time was 2.6. But here’s what it gave us. It gave us an idea of what the multiple from sales to price stock price are. Give us some idea of how we’re going to come up with our evaluation. What would we be? Work? And we took the averages and when we did a weighted average, and it turns out that at this time the average operating margin was 24% the profit margin was 13% and they were trading at two point Sorry, 3.2 X.

It’s sort of an art in many ways because you’ve got to look at these companies and say, What are what are my profit margins? If I’m a clothing company and I’m doing 1% do you think that you’re going to get the highest valuation? Maybe if you’re growing 30 40 50% a year, but if you’re not, then you’re probably going to get discounted. And there’s tons of other information that we took into account in these comparables. For example, if you pull up the yearly report that every single public company has to do, you’re going to find more information in there on companies than you ever dreamed. It’s really small print, and not a lot of people read it, but I do and what we found out, for instance, some information you can find out from these is Colombia. Colombia at the time was doing 1.32 billion.

They had 12,000 stores. So what we were able to do, although it’s not completely accurate, because I’m sure there are some big box retailers that accounted for much more. But then we were able to figure out, well, what’s the revenue per retailer in that case is about 110,000 now. Like I said, that’s not going to be absolutely exact because it’s not a weighted average. But it starts to give you statistics and starts to give you comparables so that you can start to understand these companies that are in your space and all of this information. If you’re a software company, they’re going to give you our pu. They’re going to give you turn rates.

They’re going to give you conversion rates. They’re going to give you all this stuff. In fact, for most any industry, they’re going to give you the key kpi s that are across that industry and normal. So any key performance indicator, they’re generally going to report because they are required to do that for the most part. So build your comparables and then come up and get a feel for what that multiple of sales is. Figure out your sales, your margins and then see where you will fit. And what that’s going to do is give you a realistic idea for your evaluation. What it’s also going to do is that when you have a discussion with an investor and you say, Well, my company is worth $17 million and the investor is going to say, Well, I I don’t know if I agree with that. Well, now you can pull out your comp chart and say, Here’s all the comparables. We looked at 10 companies.

Some of them were small. Some of those who were, uh, large cap, some of the small cap. Some of them are growing fast, some of them growing slow. And here’s what we come up with now you’re going to have an educated discussion about your evaluation and the investor, whether or not they agreed at this point, doesn’t as much matter as at least they know you’re doing your homework and a lot of entrepreneurs missed this step and they’ll say, Well, I believe that my company is worth X and I think that’s awesome. But if you don’t have that data behind it, it’s going to be very, very hard for you to have a defendable discussion with an investor and get the valuation that you want.

What’s the right valuation? And should you go for more? That’s a whole another discussion for another day. But build these comparables, see what you come up with and pull those yearly reports from public companies in your sector, and you’re going to discover just a ton of information that didn’t even realize was in there. And a lot of it has market research. They just have it just incredible. So build your comparables, understand your evaluation and have a defendable evaluation for your business.

Thanks for being generous with your time and joining us for this episode of Build a business success secrets. Before we go, let me ask you a quick question. Are you the type of person who wants to get 100% out of your time, talent and ideas? If so, you’ll love our monthly Built A Business Success Secrets newsletter. It’s a monthly playbook about the inner game of building a successful business. Recent issues have shown how to avoid losing money on Facebook and instagram paid ads with this science backed strategy.

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