VALUATION FOR EARLY-STAGE COMPANIES

Evaluate a company, as discussed in the articles ”Valuation of Hospitals and Medical Clinics” and”Valuation in Civil Construction, An Analysis Beyond DRE”, published in 2018 in Blog of FC Partners, is not a trivial process, since it requires a lot of analysis time and experience on the part of the evaluator. Each segment has specific characteristics that must be taken into account when preparing a Valuation Report (Valuation). In addition to the business segment of the company to be evaluated, another important factor to be considered during the preparation of a Valuation It is the stage of operation in which it is found. Depending on your internship, different types of assessment methodologies can be applied, even impacting the final result. Early-stage companies, Early Stage, generally present rapid growth potential and focus in the early years on the development of innovative products, processes or services. Due to the short maturation time of the product offered, the estimates used in Valuation they end up being more abstract and often based on the entrepreneur's perspectives, which, although important, should not have much relevance in an independent assessment. In addition to purely financial analyses, market research must have an even greater weight compared to the others Valuations. This occurs, because the Early Stage Companies, as described above, they are introducing new trends. An evaluator, therefore, must be clear about the market in which this company operates, as well as the technology developed, adherence to the market, barrier, competitive advantage, business model, risks inherent to the operation, etc. The main method used to evaluate internship companies Early Stage It is the Discounted Cash Flow (DCF), however, an appraiser may choose to use other equally important methodologies. The main exponent of the subject, Aswath Damodaran, also addresses in his book”The Dark Side of Valuation” about companies Early Stage, bringing Inputs about for the approach in evaluating the DCF.

As already discussed in the article”Valuation of Companies Through Multiples, a Comparative Analysis”, using the multiples of peer companies to evaluate start-up companies is one of the alternatives to DCF, but less used. In theory, the multiples resulting from the operations of peer companies can be used as parameters to evaluate the company in question. Another method that can also be used is Risk Factor Assessment. This method consists of listing the main risks associated with the company's operation (e.g., management, product, competition, technology, etc.), and consequently, evaluating each of them. With the average value found in the multiple assessment as a starting point, for those risks with a low occurrence factor, a upgrade in the value of the company and, on the contrary, for those risks with a high occurrence factor, a downgrade. This method, therefore, distinguishes the company's main unique characteristics from its peers.

Another widely used method is Scorecard, which is constantly used to evaluate companies Early Stage, mainly for some funds from Venture Capital. As in a Risk Factor assessment, some criteria are selected, from a qualitative analysis perspective, where each criterion has a weight and impact on the success of the operation. The final weighting will be the multiplier that will be applied to the initial value that uses the valuation by multiples as a starting point.

Regardless of the valuation method that will be used for companies Early Stage, it is important for the evaluator to be able to analyze in addition to financial numbers (quantitative analysis), extrapolating knowledge to more subjective, qualitative analyses, considering that many of the times these companies do not have any revenues. It is important to emphasize that the Valuation Report is a guide given to the purchaser/seller regardless of the value of the subject company, in which it will be used for future Mergers & Acquisitions (M&A) negotiations. Even so, the subjective values, in a probable negotiation, may exceed financial limits and overvaluation of the company, regardless of the score of Valuation.ARTICLE WRITTEN BY HENRIQUE PORTO — PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br