One question comes up with business plans – should the valuation be in?

My general reaction is no. However, there’s a case where it could be in.

The reason I don’t like it in is because that sets a ceiling for the transaction. Someone is not likely to come on in and offer a higher valuation than what you have put in your plan. That is unless you suddenly have a competitive situation with multiple investors competing and happen to be a hot property or you happen to have grossly undervalued your company in the valuation that you did put down. Having a valuation in almost never works in your favor and usually can work against you. So you might say you have a high valuation in, but that can work against you to because it can scare investors off if they feel you’re too unrealistic in your expectations.

There is an optional case though where valuation could be put in- the historical valuations. If you put it in a cap table, it would show that the capitalization of the shares that have already been purchased for the company. Then you might also show the valuation that was put in at the time of those investments. It shows that you are savvy enough to know about valuation and that you thought about it in the past. It also can, perhaps, point out trends in your valuations over time.

However, if your circumstances has changed and, in particular, if you’re looking at a professional institutional investor coming in, like a private equity firm, then they’re going to do their own valuation. If it happens to be a down round, where the valuation falls from the previous equity round, this may be what you may have to live with. Perhaps with some incentives, you can get additional shares later and get the valuation back up.

But, as far as for the future valuation, I think that discussion and any supporting schedules are better off left outside the business plan to cover when you get down face to face with the investor. When you can, let the investor go first and get their number. Don’t put a number out there yourself, whether in the business plan or in the discussion, that then becomes a ceiling for the transaction.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value