TIGER Talk Recap: Why You Shouldn’t Take the Money. The Other Side of Business Valuation and Investments
New entrepreneurs may think their first line of business is to get an investor and determine how much their company is worth. But Randy Gerber, founder and principal of Gerber, LLC, says these are not necessarily the best first steps to take.
Providing an alternative perspective, Randy presented, “Why You Shouldn’t Take the Money. The Other Side of the Business Valuation and Investments” to a group of entrepreneurs during Innovate New Albany’s TIGER Talk luncheon on November 11. TIGER Talks are offered free of charge throughout the month, and educate entrepreneurs in the areas of Technology, Innovation, Growth, Entrepreneurship and Responsibility.
Gerber LLC is a professional services firm that works exclusively with first-generation entrepreneurs. Randy said that in his experience, valuation is a waste of time and money for most applications.
He discussed seven reasons why business owners think they need a valuation, and provided his thoughts and insights on each one:
- To get an investor. Randy said the problem with this reason is that investors will value the company at what they think it’s worth, and together you will negotiate. Since a valuation can cost up to $30,000 and take 20-40 hours of time, it may not be worth the investment.
- To bring on a partner. The same reasoning applies with bringing on a partner as with getting an investor. You and your potential partner will likely negotiate how much the company is worth.
- Getting a divorce. Randy said this is the least popular but most utilized reason to get a validation.
- Employee compensation systems. You may need a formula to derive the value of a company so you can pay your employees.
- A vendor requires it. This happens every once in awhile, and would be a good reason to have a valuation.
- Estate planning. This is an unusual situation, but a valid reason to have a valuation done.
- To boost your ego. Randy said wanting to be able to talk about how much your company is worth is the worst reason to invest in a valuation.
Randy said getting a valuation can make entrepreneurs lose momentum and focus. It’s important to be honest with yourself about why you think you need one. Additionally, in his experience, the valuation outcome usually doesn’t match the market.
Randy also cautioned the group about taking investor dollars. He said good reasons to get an investor are for scaling your company, for risk mitigation and for diversification.
But a bad reason for taking investor dollars is for raising money without a plan. He said step one of launching a business is not necessarily to raise capital. Instead, have a written plan and boot strap around what you have. In his experience, the clients that have the most cash flow are those that started from organic funding. He said there is a place for equity, but you shouldn’t necessarily start there.
Randy shared several stories and examples of companies he has worked with to illustrate his points. He invited questions from the group, which inspired informative and interactive discussions.
If you’d like more information about Randy and Gerber LLC, you can visit his website at http://www.gerberclarity.com/home.
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