Business Valuation Dealroom Metrics

1. PRESENTED BY:
Anthony Chamungwana
Mentor.
MENTORSHIP
ON
FINANCIAL REVIEW

3. LESSON 1

4. Introduction
The objective of this portion of mentorship is to allow the
entrepreneurs learn practical insights on how to assess and
value business and Learn how to identify factors that may influence an
investor's perception of "business value”. The mentorship will focus on:
› Introducing common approaches used for arriving at values that form the
basis of negotiation with investors/financiers/shareholders. In addition to
valuation methods, you will understand the importance of gathering a deep
understanding of the organization's industry, technology, business
environment, customers, competitors, synergies, current major
stakeholders, and the rationale for selling or the reluctance to sell and how
all these factors come into play when arriving at valuations.
› Teach you how to value a business and get a deeper understanding of the
variables in business valuation to help you make the right decisions.
› Introduces you to the essence of Deal Room
› What contents are to be presented in a deal roam
› Introduces you to deal room ethics

5. Financial Review Defined
Business valuation, also known as company valuation, is the process
through which the economic value of a business is calculated.
Purposes of Business Valuation:
› The purpose of a valuation is to find the intrinsic value of a company
- its value from an objective perspective.
› Business valuations are used for a variety of reasons mostly by
investors, business owners and intermediaries such as
banks/financiers, who are seeking to accurately value the
company’s equity and performance for some form of investment or
divesture.
› Identify factors that may influence an investor's perception of
"business value”’.

6. The Big Question
› Why do we evaluate businesses?
› How should you approach reviewing your financials?
› What documents should you analyse?
› What exactly should you be looking for?
THESE ARE FUNDAMENTAL QUESTIONS THAT THIS
MENTORSHIP PROGRAM WILL DISCUSS.

7. WHY DO WE CONDUCT BUSINESS VALUATION
A business valuation helps establish a baseline value which enables you to
create more informed financial goals, business strategies and marketing
objectives. Annual business valuations allow you to understand your
company's potential for growth and innovation.
Business Valuation Drivers:
1. Understand Your Current Business Value
› Create a baseline value for your company to know where you stand
in the marketplace. Know how far your company has come since its
inception. Its Financial Performance and how your company
competes with its peers in the market.
2. Understand Potential for Growth:
› A business valuation helps establish a baseline value which enables
you to create more informed financial goals, business strategies and
marketing objectives. Annual business valuations allow you to
understand your company’s potential for growth and innovation.

8. WHY IS DO WE CONDUCT BUSINESS VALUATION
3. Ensure Proper Protection of Your Asset
› Knowing the real value of your most prized asset allows you to
protect it best.
4. Develop a Succession, exit or Sale Plan
5. For Buy-Sell Agreements (With Partners, etc)
6. To Work With Lenders/Investors
7. Trust/Estate Planning
› Your business worth determines what kind of tax planning you need
to do for your estate (Other countries, E.g. USA estate tax
exemption limit).
8. Strategize for Future Acquisitions
› Business valuation allows you to know where you stand now and
your company’s potential for growth, including developing strategies
for future divesture/acquisitions/fund raising/expansion.

9. Motives for Business Valuation

10. Open Discussion

11. LESSON 2

12. VALUATION METHODS
1. Book Value
One of the most straightforward methods of valuing a company is to calculate
its book value using information from its balance sheet. Due to the simplicity of
this method, however, it’s notably unreliable.
Formular: Subtract the company’s liabilities from its assets to determine
owners’ equity. Then exclude any intangible assets. The figure you’re left with
represents the value of any tangible assets the company owns.
Other School of Thought on this method: B/S figures can’t be equated with
value due to historical cost accounting and the principle of conservatism.
Relying on basic accounting metrics doesn't paint an accurate picture of a
business’s true value.
Intangible asset is an asset that is not physical in nature (goodwill,
intellectual property, trademarks)

13. VALUATION METHODS…….
2. Discounted Cash Flows
Discounted cash flow valuation is a process of estimating the value of
a company or investment based on the money, or cash flows, it’s
expected to generate in the future.
Formular:
The benefit of discounted cash flow analysis is that it reflects a
company’s ability to generate liquid assets.

14. VALUATION METHODS…….
Downside
The major limitation of DCF is that it involves estimates, NOT
ACTUALS. So the result of DCF is also an estimate.
Future cash flows are subject to a number of factors e.g. market
demand, performance of the economy, technology, competition,
regulatory environment and unforeseen threats or opportunities.
These cannot be quantified with precision. Investors/entrepreneurs
must understand this inherent drawback for their decision-making
while using this method.
NOTE:
For DCF to be of value, estimates used in the calculation must be as
accurate as possible. Badly estimated future cash flows that are too
high can result in an investment that might not pay off enough in the
future. Likewise, if future cash flows are too low due to rough
estimates, they can make an investment appear too costly, which
could result in missed opportunities.

15. VALUATION METHODS
3. Market Capitalization
Market capitalization is one of the simplest measures of a publicly
traded company's value. It’s calculated by multiplying the total
number of shares by the current share price.
Market Capitalization = Share Price x Total Number of Shares
One of the shortcomings of market capitalization is that it only
accounts for the value of equity, while most companies are financed
by a combination of debt and equity.

16. VALUATION METHODS…….
4. Enterprise Value
Enterprise value (EV) measures a company's total value, often used as a
more comprehensive alternative to market capitalization
The components of EV include market capitalization, total debt, and cash
and cash equivalents.
Enterprise Value = Debt + Equity – Cash
Limitations of EV:
1. Its failure to consider off-balance sheet items (e.g. leases, contingent
liabilities) and its comparability to other financial metrics which may
underestimate the total value of a company's assets.
2. Its sensitivity to changes in interest rates (which may provide unreliable
indicator of a company's overall value during periods of significant
interest rate volatility)

17. VALUATION METHODS…….
5. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization):
It measure a company’s financial health and ability to generate cash flow.
NOTE:
(i) Tax policies/treatment of a country can have significant influence on earning
(ii) Net income subtracts interest payments to debt holders, which can make
organizations look more or less successful based solely on their capital
structures. Given these considerations, both are added back to arrive at
EBIT (Earnings Before Interest and Taxes).”
Formular: EBITDA = E+I+T+D+A
Where: E= net income, I=Interest, T=Taxes, D=Depreciation, A= Amortization
NOTE:
1. EBITDA calculations can be deceptive: It can be used to obscure warning
signs, such as high levels of debt, escalating expenses and lack of profitability.

18. VALUATION METHODS…….Some dfns
2. EBITDA does not account for changes in working capital. While -ve
EBITDA value tends to signal that the business has trouble with profitability, a
+ve value is not necessarily synonymous with a healthy company (taxes and
interest are actual expenses for which that business must account.
3. EBITDA can be manipulated. EBITDA can also provide a distorted picture
of how much money a company has available to pay off interest. When you
add back depreciation and amortization, a company’s earnings can appear
greater than they really are. EBITDA can also be manipulated by changing
depreciation schedules to inflate a company’s profit projections.
Definitions:
Amortization is the process of incrementally charging the cost of an intangible asset
(good will, trademarks, intellectual properties) to expense over its expected period of
use, which shifts the asset from the B/S to the Income statement. It essentially reflects
the consumption of an intangible asset over its useful life.
Depreciation is a planned, gradual reduction in the recorded value of a tangible asset
over its useful life by charging it to expense. Depreciation is applied to fixed assets,
which generally experience a loss in their utility over multiple years.

19. Questions for Discussion
Having reviewed different business valuation methods, the
questions that arises are:
› which is the best valuation method to use?
› How do we know whether a given valuation method is
more appropriate for a specific company than the
others?
› Is there one best method that fits all purposes

20. Open Discussion

21. Discussion…….
When choosing evaluation method, one need to look at 3 key factors:
1. Characteristics of the Company: The first and most important factor
is the characteristics of the company that is being valued (e.g.
company with fixed assets and those with intellectual properties such
as google).
2. Characteristics of the Investor: institutional, individual, sector, bank.
3. Purpose/motive of Investment: What is the purpose of investment
(e.g. M&A, Acquisition, direct investment, is it for short, medium, long
term, etc).
Recommended : Use of Multiple models
It is advised to use multiple models to derive the valuation of a
company, instead of using a single model.

23. LESSON 3

24. Dealroom ….Defined
DealRoom is a digital investment platform that provides access to
opportunities and brings entrepreneurs/startups and investors
together in a single digital platform. It provides to both parties:
• A digital engagement platform/space
• It leverages data, network and partnerships to digitally connect with
investors or investors connecting with investment opportunities
• Provide research information on multi-sectors
• Provides a database and in-sector/industry analysis with market
analysis and insights, compliance and regulatory information
• Trusted/reliable engagement space

25. Choosing a Deal Room
o Many deal rooms are designed to target specific sectors/industries
e.g. tech, fintech, agriculture, energy, etc.
o This does not mean that there are no universal deal rooms that are
open for all sectors.
o Before making submission to a deal room, it is important for the
entrepreneur to understand:
1. Qualification requirements
2. Terms and conditions
3. Type of investment(s) offered
4. Documents required during submission
5. Ask yourself, Does my business qualify? Is there area of
improvement I am required to meet the application criteria?
6. Where criteria are not met, DO NOT APPLY.

26. Key Documents to be submitted
Deal rooms are designed to provide both applicant entrepreneurs and
investors with key information that help each to make informed decision. Key
documents required from the applicant include, but not limited to:
I. Product–market fit (Concept)
II. Data that shows you have a large addressable target market:
• Include market sizing and drill down to your target market
• Data that shows you are solving a real problem and that the solution
is sustainable (If no problem being solved, NO business)
This also includes customer data to prove your value proposition and pricing
model:
• Customer acquisition and retention strategy (supported by data)
• Customer engagement levels (for example, how often do they use your
product/service and which product functions they use)
• Customer ROI
• Growth potential (supported by data)
• Competitive positioning

27. Key Documents to be submitted
III. Financials
1. Detailed Financial projections (3-5 years)-Where debt applied, projections
must be in line with the debt tenor
2. Audited financials (If NOT new coy) at least for 3 years with latest mgt a/c
Investor are looking for your profit and loss history, balance sheet, current
financing structure and comparable valuations and in particular looking for
these key drivers:
• Gross margins
• Trajectory of monthly recurring revenue (MRR)/costs
• Cost of acquisition (CAC)
• Long-term value (LTV) quantification
LTV is calculated by multiplying the value of the customer to the business by
their average lifespan. It helps a company identify how much revenue they can
expect to earn from a customer over the life of their relationship with the
company.
Customer value is created through the solution that a product or service
provides, not only to the buyer but to their organization as well and it is
subjective.

28. Key Documents to be submitted
• Sales pipeline and forecasts
• Planned application/usage of funds being raised
• Major offtake contracts to validate business model (where such
exists)
IMPORTANT:
o Be transparent in your numbers.
o Avoid red flags such (e.g. dealings with other companies run by
the same founders, intercompany assets or Intellectual Property
(IP) ownership. These need to be minimized or clearly
explained.
o Highlight non-dilutive funding or support you have raised through
pitching contests, and provincial and grants, as it further
validates your business and increases your credibility as a
credible company.

29. Key Documents to be submitted
IV. Company documents and cap table
› Work on maintaining a “clean cap” table leading up to fundraising to
minimize investor objections.
A “clean cap” table is one with no toxic debt or founder over-dilution
› Provide the following documents:
• Articles of incorporation (MEMATS
• Co-founders’ bios and profiles of other investors
• Share option pool where such exists (these are shares reserved for
special group, e.g. employees
• Terms and clauses that may impact the future, such as liquidation
preferences on prior term sheets that will affect new investors
A liquidation preference is a clause in a contract that dictates the pay-out
order in case of a corporate liquidation. i.e. the company's investors or
preferred stockholders get their money back first, ahead of other kinds of
stockholders or debtholders, in the event that the company must be
liquidated.

30. Key Documents to be submitted
NOTE:
Investors or VCs like to see co-founders who have solid skin in the
game in terms of their financial stakes. They may be wary if early-
stage founders are proposing to give away a significant percentage of
the equity (typically over 20%) in a financing round.
V. Product road map and competitive positioning
In order to demonstrate your product’s value and market
differentiation, include data such as:
• A product/service demo link
• Information on your intellectual property (e.g. patents and
trademarks)
• Analyst reports that validate your product/services

31. Key Documents to be submitted
VI. Available Skillsets/Staff
Founders and co-founders are generally expected to be singularly
focused/involved on their startup/business. If that is not the case, you
need to be able to provide investors with a good reason why you are
not, as well as a plan for the transition to full time involvement to show
their commitment to the business. Include details about:
• Founders and their individual (and joint) working track records
• Bios of advisors and other key executives
• Transition plan to full involvement
What NOT to share in your deal room
Make sure you do not share code or any proprietary information (such as high-
value sales prospects) or trade secrets in your data room.

32. Open Discussion

34. Deal Room ethics
o Ethics can be defined as moral principles that govern a person's or
business’s behaviour or the conduct of their activities.
o Deal rooms, like any other trading platforms, are guided by sets of
ethics that guide the conducts stakeholders.
Importance of Ethical Behaviour:
• Consistent ethical behaviour (company, directors) comes
an increasingly positive public image.
• Considerations to potential investors and
shareholders/stakeholders.
• Retention of positive image (necessary to investors &
Stakeholders)
• An ethical behaviour can result into to reputation and financial risks

35. Ethical Behavior Elements
When participating/engaging in a deal room, you are required to
observe/exhibit at least the following basic ethical behaviours:
1. Integrity: When engaging in the deal room, one must demonstrate honesty,
trustworthiness, and reliability and hold themselves to a higher standard.
2. Accountability and Responsibility: You are accountable for your action,
including everything you submit to the platform. Commitment to following and
adhering to ethical practices and rules as defined by the platform (dealroom)
is paramount.
3. Transparency: Without divulging trade secrets, you must ensure that
information submitted e.g. financials, prices, various company policies, and
promotions are available to those interested in the business's success (incl.
investors/stakeholders) and represent a true picture/reality.
4. Respect for others: You must foster ethical behaviour and environments in
the Deal Room, including, privacy, equality, opportunity, dignity, compassion,
and empathy.

36. Ethical Behavior Elements…..
5. Respect for laws and compliance: You must ensure that your
business adheres and comply to both regulations as set by the deal
room and all local and national business compliance/ laws.
6. Environmental concern: In a world where resources are limited,
ecosystems have been damaged by past practices, and the climate is
changing, it is of utmost importance to be aware of and concerned
about the environmental impacts a business may cause and provide
mitigation to address them

37. Take Aways
› Unethical business practices and ethical misconduct can lead to
serious consequences which can cause the company time and
money in trying to repair their business reputation and any legal
issues that may arise depending on the severity of the situation.
› Can lead to be restricted from the dealing room and loss of
investors
› To protect your company from an ethical misconduct, you need to
incorporate a management plan, policies and corporate culture in
order to stay on top of any unethical practices within the corporate
environment.

38. Open Discussion

39. Vote of Thanks