BEN Event: 9th Feb 2010 - Business Funding in tough times

1. How to agree a business valuation …that is acceptable to both investor and investee…

2. Challenges are significant Valuation is key to pricing The pre-money valuation …Yields the post MV Thus a Pre MV of £3m with a £1m investment …Equals a post MV of £4m …With the investors owning ? 25% of the company = £1m ÷ £4m

3. THE ISSUE IS HOW TO ARRIVE AT THE £3M PRE MONEY VALUATION?

4. Methods include… Venture capital method Discounted Cash Flow Option Method However… I will illustrate and highlight a piece of the equation that is left out of conventional valuation discussions but is an absolute reality…

5. Take a typical negotiation of round 1 financing Start at the issue of ‘valuation’ Investee lays a number on the table Based on art as much as science A different number comes from the VC Price settles somewhere in the middle Final result is usually closer to … And then… the negotiations start

7. The investee and investor CANNOT understand the valuation until they fully understand deal terms Thus the Term sheet might state a pre MV of £3m and from the investee’s perspective =  but £3m only stacks up if the new investors are getting ordinary shares (rank pari-passu) …AND that is hardly ever the case

8. Lets assume the new investment share is a cumulative preference share New investor gets their money back + accrued dividends before you get anything If the dividend is 10% a year, = 10% x 25% or a further dilution of 2.5% a year Also assume that there is a 50:50 chance that the company may be sold for less than post MV, say £2m not £4m

9. Savage deal terms? … What is remarkable is the lack of quantification work on the impact of deal terms on notional values Agreed negotiations on pre MV does not determine the investee / investor outcome But if the company is sold for £500m does it matter? If it is £5m does it matter more?

10. Pre MV has no definitive significance But as valuation determines the parties relative %’s it is a critical number So, understand the material ‘what if’ scenarios and have all the material information at your fingertips when you start negotiating