Stories of Technology, Innovation, & Entrepreneurship in the Southeast

By Tom Ballard, Chief Alliance Officer, PYA

After a weekend devoted to “The Maker City Summit” that kicked-off “Innov865 Week” in Knoxville, PYA, the power behind teknovation.biz, hosted a “Valuation Lunch and Learn” on Monday.

Held in the PYA headquarters in Knoxville, the event drew about 20 people who heard from Anna Bhat, a member of the firm’s valuation service line and Managing Principal of PYA’s newest office in Charlotte, NC. Attendees included two entrepreneurs who will be pitching at Tuesday’s “Startup Day” – John Phillips of Primeaux who also founded Phillips Forged and Douglas Mapp, Founder of ThinkUp – and a third – Corey Tyree of Trillium Renewable Chemicals – who is part of the fireside chat. There were also four current or former members of the “Innovation Crossroads” program who were in the room.

Over a roughly one-hour period, Bhat (pictured right) conducted what she titled as a “Value and Valuation 101” class, outlining four goals. They were to define value, discuss the interplay of risk and return, provide an overview of valuation methodology, and discuss the role of advisors. Throughout the presentation, she was peppered with questions from attendees.

“Value is a financial concept, an economic concept, and a forward-looking concept,” Bhat explained, adding, “Buy versus build is also a good way to think about value,” a reference to whether the potential acquirer is better served to buy the firm rather than try to build its own version.

She described three approaches to establishing value.

• The first is fair market value (FMV) which is the price at which the property or service would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of the relevant facts. FMV is a range with the final transaction price negotiated between the willing buyer and seller.
• The second – strategic value – is the value of that asset to a specific buyer. To explain it, Bhat used Facebook’s purchase of WhatsApp for $19 billion in 20212. As noted in the press at the time, the acquisition silenced a growing competitor.
• The final approach is investment value which contemplates future possibilities for a business or group of assets.

In terms of valuation, Bhat stressed the importance of knowing the reason to conduct the valuation since the process can differ based on the purpose. Is it for tax reasons? Is it for internal strategic planning? Perhaps it’s for bank financing or a pitch event like Shark Tank.

She identified three primary approaches to valuation.

• In the asset approach, assets and liabilities are adjusted to their FMV, and then the liabilities are subtracted from the assets to determine the value.
• The income approach takes the present value of future cash flows that can be generated.
• Finally, the market approach compares the company to other similar businesses, business interests, or securities that have been sold.

Bhat also reviewed several different valuation methodologies.

• Berkus Method is a simplistic method but a starting point that evaluates five factors (sound idea, prototype, management quality, strategic relationships, and product rollout or sales) and assigns $0 to $500k for the entity’s strength in each area.
• Scorecard Valuation requires a determination of the average valuation of pre-revenue companies in a particular geographic region and then compares the strengths of the start-up relative to the average company in the following areas: management strength, size of opportunity, product/service, competition, marketing and partnerships, and additional investment needs.
• Risk factor summation identifies the number of risk factors and scores the entity on a scale of -2 to +2. For each point, a dollar value is applied based on the average pre-revenue valuation in the specific geography.
• Finally, the venture capital method uses potential exit value and required rate of return and time horizon.

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