Businesses often require external funding to support their growth. Securing investments comes with risks, and a credible valuation is critical for attracting investors. Companies that are already trading should present financials and management accounts, while early-stage firms must emphasize realistic forecasts in their business plans. Speculative financial projections may strain future relations with investors if initial valuations do not align with actual performance. A conservative approach to valuations helps maintain investor trust and avoids overselling expectations.
Investors will wish to see a credible valuation for the company which is raising investment, and the more substance that lies behind this, the better. Is the company already trading? If yes, what financials are available?
Even if the company has researched the position carefully, financial projections are by their nature highly speculative which is why they are rarely supported by warranties in the transaction documentation.
If the initial valuation proves too frothy, relations may start to sour quickly, and founders will spend more time on managing relations with grumpy stakeholders than on building their business.
Far better to take a realistic, even conservative, approach to valuations and projections, to avoid overselling the idea, and to then exceed those expectations.
#business-funding #investment-risks #valuation-strategies #financial-projections #investor-relations
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