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Valuation

Valuing early-stage companies can be more of an art than a science. Here I'll explain the basics behind discounted cash flow (DCF) and multiple-based valuation, and detail how they are implemented in Foresight's models.

Valuation is tricky. Valuing a company take a combination of art and science: the math isn't hard, but applying the math correctly takes some experience to understand the real-life, practical thinking and context behind the math. It's easy to put the calculations to create a discounted cash flow valuation (DCF) in a spreadsheet, but much harder to make sense of it and apply it to real-life situations.

That's why I've always resisted putting company valuations into the model templates, but after feedback from users I reconsidered and decided to build a structure for valuation into the model. The Forecast sheet in the Standard Model will do a discounted cash flow and EBITDA multiple valuation based on the projections in the model. [1]

How to use

Please tred carefully into using the Valuation forecast. Valuations are highly dependent on the industry-specific assumptions and the variability of the underlying cash flows, and using these methods could help, hurt, or distract you from the meaningful components of a valuation conversation.

Often when sharing the model with investors I advise entrepreneurs to remove the valuation-related calculations from the Forecast sheet, just to focus the discussion on the business, not the exits.

How it works

From the assumptions on Get Started, the valuation-related calcs on the Forecast sheet then calculates the valuation of the company at each point in time, meaning the valuation at the end of every month, quarter, or year, based on what has happened so far and what it expects in the future.

Inputs

The Valuation assumptions are on the Get Started sheet, and consist of:

Discounted Cash Flow (DCF) Method

  • WACC (used as NPV Discount Rate - WACC = Weighted Average Cost of Capital. Good data source for industry-specific WACC ›
  • WACC (NPV Discount Rate, quarterly) - converted to a quarterly rate for NPV calculations
  • WACC (NPV Discount Rate, monthly) - converted to a monthly rate for NPV calculations

Terminal Value Calculation (for DCF)

  • Discount Rate (WACC)
  • Long-Term Growth Rate - Choose long-term growth rate applicable for your company or your industry. Good dataset here ›

EBITDA Multiple Valuation Method

  • Valuation Multiple: X multiple of Revenue - Multiple of trailing 12 months net revenues. Industry-based comparable multiples require research and analyis for your industry. Questions, contact me.
  • Valuation Multiple: X multiple of EBITDA - Multiple of trailing 12 months EBITDA (earnings before interest, taxes, depreciation, and amortization). Industry-based comparable multiples require research and analyis for your industry. Questions, contact me.

Common Modifications

These calculations are not commonly modified, but can be changed or added to based on the valuation analysis best for the specific situation.

For more reading on valuation,

Using Equidam for Valuations

If you decide you want a third-party valuation to assist in your valuation discussions, Equidam is very straightforwrd to use. Simply signup, fill out their questionnaire about your business, and input your financial projections (which can be generated from any Foresight financial model), and Equidam creates a valuation analysis through a weighted-average of five different valuation methodologies. Once your valuation is complete, you can update your answers and projections and access your valuation for the period of time that you select. [2]


  1. By default, the valuation ties to the exit value on the Cap Table on the Forecast sheet, and the model will automatically calculate the distribution of exit proceeds to the shareholders and calculate returns. Just be careful; don't forget the art to valuation behind the math. ↩︎

  2. Links to Equidam are referral links for which Foresight receives a percentage referral fee. ↩︎