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By Tom Wacher, Kreston Reeves

The BBC’s Dragons’ Den is now in its 16 th season with the highs and lows of building a business remaining compelling viewing. It entertains and can be excruciating in equal measure, particularly when the Dragons roll their eyes following a wildly optimistic valuation of the hopeful’s business. So why is it so difficult to value a business? Partner Tom Wacher highlights some of the more common mistakes.

1: Unrealistic revenue and profit projections

The first mistake is unrealistic revenue and profit projections. There are many ways to value a business, most of which are broadly based on multiples of revenue and/or profits.

With established businesses that have a trading record, determining this is a relatively straightforward exercise with years of historic data to draw upon.

That is not the case with start-ups or fast-growing businesses where the past is not representative of the future. Ambitious start-ups and fast-growing businesses will often forecast rapid growth – the ‘hockey stick’ projection – but there are very obvious risks that those predictions will not be achieved. Given that the business may be pre-revenue, projections need to be credible rather than overly aspirational.

In these circumstances, a valuation is likely to be based on cash flow projections, discounted for the risks associated with the industry sector, the size of the potential market, the company’s own management team and their track record, and its strategy to achieve that growth.

2: underestimating the needs of working capital

Growing businesses need working capital, and the more they grow the more capital is needed.

Underestimating the need for future working capital can result in over-inflated free cash flows and can jeopardise the sustainability of the start-up.

A clear business plan will outline future cash flow projections including fixed, stepped and variable costs and, of course, future tax liabilities. It will also set out fixed asset purchases and working capital requirements including cash, debtor and stock levels. Higher levels of working capital will impact valuations, driving cash inflows down, but more importantly they can stunt growth and impact the chance of success for a start-up company.

3: comparing your own business to others

While finding a comparable business can be fundamental evidence of value, this is the classic mistake many business owners make, comparing their own business to that of an immediate or apparently similar competitor.

It is a valuation based on assumptions that does not necessarily take into account differences in patents, property and other assets, overheads and circumstances.

It is also worth keeping in mind that an established business with a similar turnover and profit to a younger business still in its rapid growth phase is likely to have a lower value. The comparison approach is only as good as the comparators used for the valuation.

4: defining what exactly is for sale

Failing to define exactly what is for sale can also cause problems. It is not, for example, that uncommon for a business owner to decide to sell a business but keep hold of patents and other intellectual property to then discover the value of the business is less than expected.

Alternatively, the valuation may be required of company shares rather than just the underlying trade of the business, in which case it is necessary to consider any debt owed by, or any surplus property held in the company.
Consider and define first what it is you are actually looking to sell and what will be held back before valuing a business.

5: the reason for a sale

Whilst this is perhaps less of a mistake made in valuing a business, the reason for and the timing of a sale may impact price.

Selling a business when the economy is depressed or when funding is scarce will inevitably depress valuations. So too may prices fall if it is a forced sale – for example if a husband and wife in a family run business are separating. Conversely, in some circumstances, significant premiums may be achieved depending on the acquirer’s need.

 

There are many different ways to value a business and many mistakes that can be easily made.

Choosing the right accountant or adviser to assist is critical in achieving the best and a fair valuation. They will typically value a business via two or three different models to arrive at an accurate valuation, together with drawing upon their experience of similar businesses in the same sector and geography.

Tom Wacher is a Partner in the Forensic Accounting team at Kreston Reeves, accountants and business advisers www.krestonreeves.com.

 

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Crane Venture Partners, a London, UK-based venture capital firm focused on early-stage intelligent enterprise startups, closed Crane I, its first institutional fund, at $90m.

 

Co-founded by Scott Sage and Krishna Visvanathan, and also led by Partner Andy Leaver, Crane Venture Partners is thematically focused on the impact of data and data driven solutions on the enterprise.
The firm invests at the seed stage and has made several investments to date in companies across Europe, including Aire, AVORA, Senseon, Stratio Automotive and Tessian. Several of Crane’s investments have already gone on to raise significant Series A and B rounds.

 

Crane Venture Partners recently opened its first office in Soho, London, and is actively adding to its existing portfolio of companies in Crane I and to its team as it further expands its operational support for portfolio companies.

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Kering, owner of brands including Gucci, will tighten its grip on its e-commerce operations, focusing on its own branded sites to sell its luxury products or ventures where it can control its image and client data.

 

After shifting into online shopping later than more accessible fashion labels, many luxury groups are now investing heavily in e-commerce while working on ways of retaining as much control of distribution and pricing as possible - two elements that help them maintain their aura of exclusivity.



Kering had already said it would wrest back control of web operations for brands such as Balenciaga and Alexander McQueen which had been developed by Yoox Net-A-Porter (YNAP) - an online retailer now fully owned by the group's rival Richemont.

 

Seeking to boost sales and margins, the company is also looking to turn more of its collaborations with third-party, multi-brand retailers such as Farfetch or Matchesfashion.com into what it calls online concessions, where it controls everything from the product assortment to their presentation.

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Paysend is adding six new countries to its network to allow more customers to transfer money to and from countries using their platform.

 

This comes as Paysend extended its network in areas such as India, South Africa and Sri Lanka in 2019, with plans for further expansion into Nepal, Pakistan and Turkey.

 

The Fintech startup operates in more than 70 countries and is a principal member of Mastercard, VISA and China Union pay.

 

The company has also launched a £4.2m Series B funding round on Seedrs to support its growth plans with the round being driven by Plug and Play and Digital Space Ventures. This latest funding round comes after Paysend’s £20m Series A in 2018.

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CellPoint Mobile, a London-based provider of digital commerce and payment solutions for airlines and travel companies across the globe, has raised £11m in equity financing.

 

The funding was provided by Toscafund Asset Management and managed by Penta Capital, the private equity arm of Toscafund.

 

The company intends to use the funds to:
– further scale its team globally, and
– drive additional innovation into its platform, especially in the area of intelligent analytics.

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TheRealReal, the luxury consignment platform, on Friday filed for a $100 million IPO. The eight-year-old San Francisco company plans to trade on the Nasdaq under the ticker symbol “REAL.”

 

Julie Wainwright, former CEO of Reel.com and Pets.com, founded TheRealReal in 2011. It started out as an online marketplace to help facilitate transactions for buyers and sellers of luxury goods. Over time, it expanded into brick and mortar locations as well. The company prides itself on making sure all items sold via its platform and/or stories are “authentic,” or real, hence its name.

 

Over time, TheRealReal has raised a known total of $288 million, according to its Crunchbase profile. Its last funding round was a $115 million Series G raised in July 2018. Backers include Great Hill Partners, Canaan Partners, PWP Growth Equity, InterWest Partners, Greycroft, E.ventures and Greenspring Associates.

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MMC Ventures, a UK-based venture capital firm, has launched the £52m MMC Greater London Fund as part of the Mayor of London’s new initiative – the Greater London Investment Fund.

 

The MMC Greater London Fund (GLF) will enable investment into innovative, high-potential digital companies in London to accelerate their growth with valuable connections, resources and experience. It will invest at Seed and Series A.

 

The new fund will primarily back companies already based in London and also seek investments in businesses either relocating to London or opening or expanding an office in London, providing local support to the business and any co-investors.

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Sharing economy insurance provider Pikl announces completion of a £2.5m Seed/Pre-Series A fund raise led by Sir Peter Wood, founder of Direct Line and esure.

 

Pikl, which was founded in 2016, has focused on working collaboratively with the insurance market to try and stimulate industry change to support users in the sharing economy. Its industry report published in March highlighted that the insurance needs of over 1 million short-term rental hosts are not being adequately accommodated by the UK’s major insurers. They are either being excluded from, compromised by or voided from their existing home insurance policies.

 

Pioneering insurance for the burgeoning sharing economy, Pikl has initially targeted the Airbnb market, developing products for sharing platforms, property managers and individuals – many of which are market firsts – and are sold both wholesale to the insurance market and directly to customers.

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SeedLegals, a London, UK-based legal platform for startups to streamline fundraising, closed a $4m Series A funding.

 

The platform allows companies to build and negotiate terms sheets, shareholder agreements, cap tables, stock option allocations, EIS approvals, hiring agreements, NDAs and more. The company has also introduced two new ways for companies to raise funding: SeedFAST and Instant Investment enable startups to top up investment between funding rounds.

 

The round was led by Index Ventures with participation from Kima Ventures, The Family and existing investor Seedcamp. In conjunction with the funding, Hannah Seal from Index Ventures joined SeedLegals’ board.

 

The company intends to use the funds to accelerate international expansion.

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yulife, a London, UK-based life insurance company which puts wellbeing at the core of its insurance offering, secured £10m in Series A funding.

 

The round was led by Creandum Funds, with participation from MMC Ventures and Notion Capital and existing investors Anthemis Exponential Ventures, RGAX and OurCrowd.

 

Founded in 2016 by serial entrepreneur Sammy Rubin, yulife is a life insurance company which rewards its members for living well now, as well as protecting the people around them in the future. It addresses the needs of large companies and SMEs alike, offering an end to end digital journey to streamline the buying process, and engaging with each member directly via their wellbeing app, which encourages members to complete simple wellbeing activities, such as walking or meditation, by rewarding them with Avios air miles, vouchers and gift cards from partner brands including Amazon and ASOS.

 

The company plans to use the funds to further develop their product and reach more businesses.

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