So, how do they know if a business is worth what the founder claims? In this guide, we’ll break down the basics of business valuation in plain English, inspired by Dragons’ Den. We’ll cover common formulas, like the “Revenue Multiple” or “Discounted Cash Flow,” explain why they matter, and make sense of the lingo that’s crucial to getting that all-important investment.
Imagine you’re pitching to the dragons with a shiny, fast-growing product. Your business is doing well, and you’ve made R1 million in sales over the last year. The Revenue Multiple formula is a quick and simple way to give the dragons a sense of your company’s market potential, even if you’re not profitable just yet. Essentially, you’re slapping a “sales price tag” on your business based on current revenue, which is attractive if growth is steady and future potential looks bright.
Book Value, or Net Asset Value (NAV), is the valuation that looks at the tangible stuff you own: stock, machinery, equipment, and other assets. This is a great method if you have an asset-heavy business, like a café with valuable equipment or a manufacturing company. It gives the dragons a sense of your business’s solid, physical worth.
Discounted Cash Flow (DCF) is like the crystal ball of valuation methods. It estimates the future cash your business might generate and discounts it to what it’s worth today, factoring in risk and time. Perfect for a business with big growth potential, this method can impress dragons if you can convince them that future earnings are realistic.
The EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortisation) ratio is a go-to for valuing businesses with steady earnings. It gives the dragons a quick look at profits without the complications of debt or taxes, making comparisons across different companies easier.
This is the ultimate conservative valuation method, ideal for businesses with significant physical assets. Think of it as a “what’s in the box” valuation—it’s just about the things you physically own, not projections or potential.
Market Capitalisation is for publicly traded companies, calculated by multiplying the current share price by the number of shares. While private businesses can’t use this exact method, understanding it can help if you ever plan to take your company public.
Precedent Transactions use past sales of similar companies to guide your valuation, especially if you’re in a hot industry with recent activity. It’s a quick way to show the dragons what similar businesses are selling for, grounding your valuation in real-world data.
The P/E ratio is often used for established companies with steady profits, showing investors how much they’re paying per dollar of earnings. If you’re a profitable business, this can be a compelling number to use.
The Gordon Growth Model is a good fit for companies that pay consistent dividends. This formula is all about future dividends and assumes steady growth—perfect if you’re in a traditional, reliable industry.
When it comes to pitching your business on Dragons’ Den, getting your valuation right is crucial. From the simple Revenue Multiple to the in-depth Discounted Cash Flow, each formula tells the dragons something different about your business. The key is to pick a valuation approach that matches your business’s unique qualities and stage of growth. And remember: the dragons aren’t just looking for big numbers; they want realistic, well-justified valuations that show you’ve done your homework. By knowing these methods, you can confidently enter the den and stand your ground, showing the dragons—and potential investors—that your business is a solid investment.
