There are two critical conversations you must have before taking in new investment. These are:

Value Your Company Based on Future Profit Potential

Alignment on Selling Shares & Major Decisions

In this blog I tackle the ‘Valuation based on Future Profit Potential’ conversation. (There are a couple of links in the above buttons that lead you to interesting articles that will also be of value to you).

Value Your Company Based on Future Profit Potential

You can choose to enter into a negotiation or not at all. You can choose when to talk to potential investors, and should. Yet many people meander aimlessly into investor negotiations and chew-up valuable management time with no end in mind.

To be investor-ready, you must first know the valuation methodology you will rely on when negotiating with investors. There is much written on the subject of being investor-ready. In my view the best way to get investor ready is to create a financial model based on the business plan and then project the numbers to understand the cashflows. How else can you back up your statements that your company will create a return on equity opportunity to investors??

You can choose to allow investors to value your company based on historic performance, or not. My suggestion is that you decide to only negotiate if the investor is prepared to use a future valuation methodology.

The conversation is really simple. It goes like this. “We use a future cashflow valuation method. We have modelled our business and understand the value that will be captured from implementing against our business plan. If you are not prepared to use a future valuation methodology in appraising your investment valuation, then we should stop talking now. To what extent are you interested in entering into further discussions about an investment in our company?” That’s it. See you in Part 2.