How much is my food company worth? Both entrepreneurs and investors often struggle as they try to answer this question.
In Edible-Alpha® Podcast Episode #12, Tera talks with Timothy Bickmore and Nathaniel Leach of LBW Wealth Management. LBW Wealth Management is an investment advisory firm that uses a value investing strategy to guide their investment decisions. Value investors like LBW use a bottom-up method of due diligence to establish the value of a company. They do extensive research on individual companies and look for opportunities where the share price of a company is below their estimated value, which they measure using the present value of future cash flows. LBW looks for opportunities where investments have the potential to reach their required rate of return threshold, something that is difficult but not impossible for food companies. They understand that returns can vary from year to year, as their investment horizon is long-term.
LBW’s stock valuation expertise has led them to help their clients, as applicable, better understand their respective company’s valuation. They believe that companies that are looking to raise money should do the work to develop their own estimate of the company’s value before they ask people to invest. This is in contrast to the scenario where an entrepreneur raising money allows their share price to be set by prospective investors. Company valuations should be done based on a rational justification of the future growth rate and future earnings of the company, as well as the fundamentals of the business model. For example, whether the company is defensibly unique and how long its competitive advantage can be sustained are both key drivers of a company’s value.
The stakes are high for entrepreneurs needing to raise money. A low valuation creates more dilution of ownership; a high valuation makes raising money difficult. It is difficult for entrepreneurs who are emotionally invested in their company to be objective and rational about their company and in turn, its valuation. Getting outside help is often essential to developing a reasonable and defensible estimate of the value of a company.