How to get the fair value of your business from investors

Knowing the different methods of valuing your business will give you the armour you need in meetings with investors or possible buyers. Photo/FILE 

By Scott Bellows

In Summary

• What system of valuation seems appropriate for your own business? Have investors ever tried to take advantage of you? Share your opinion and debate ideas at #KenyaEconomics on Twitter.

Linge dreaded the idea of understanding finance. All her life she remained determined to just hire an accountant whenever finance matters cropped up in her company.

Linge’s business operated a network of midwives in rural yet affluent areas of the Rift Valley and Eastern and Central Kenya. She started the business ten years before, being passionate about maternal health. Much to her surprise, the business grew and flourished due to a resurgence in preference for traditional home births.

Finally in 2012, Linge took her first finance class during her MBA. She decided to pursue post-graduate education in order to learn new marketing and operations techniques for her midwives network.

She unhappily accepted the rule that USIU required a finance course in order to complete the MBA degree. She pushed off the class until her final semester.

During the course, she did learn something new: while the terms accounting and finance often get interchanged in the workplace, in reality, the two represent drastically different concepts.

Accounting entails record keeping for historical events whereas finance encompasses forecasting future events.

Pleased that she knew the difference between the two, Linge struggled with apathy throughout the rest of the semester. During her graduation, she commented to a classmate that at least she would never touch a finance book again.

Linge’s business continued to grow and the home births trend increased among her niche target group. By April 2014, a leading Kenyan hospital approached her and inquired about buying out her business. The hospital system asked to see her financial statements.

Linge happily instructed her accountant to send over the statements.

After a few days, the hospital called her and told her that a proper valuation for her company came in at Sh50 million. For that amount, the hospital system would take over 100 per cent of the equity in Linge’s firm.

Linge went home that night pleased that her business empire could garnish such a large buyout figure.

However, throughout the night, Linge struggled to sleep. She pondered whether Sh50 million represented the accurate figure for her business. Perhaps she should receive more? Her annual sales alone came to Sh40 million, but her annual net profit represented only Sh6 million.

In the morning, she telephoned her accountant. Much to her shock, the accountant told Linge that he only kept the books and had no idea about valuation amounts. Linge then remembered that she had learned the difference between accounting and finance.

Desperate to decide before her 2pm meeting with the hospital, she called some of her former classmates as well as her finance professor.

Throughout that morning, she started to realise that finance indeed did represent a skill set that every business owner should have