👋🏾 Hi friends!

I know I’ve been sending these out on the fly of late - quite literally.

This week finds me in the Maldives spending some quality time with my (immensely) better half. It’s really the first time we’ve taken a holiday without the kids for over 20 years so you’ll forgive me for feeling a bit chirpy about where I’m at at the moment!

Here’s a quick snap of my view right now - pretty sweet right? :)

But before I gloat too much, whilst this view is lovely, our experience at the resort has not been - I spoke more about that in this post I’m titling ‘Trust but Verify is a Fallacy.’

In this weeks Off Balance, I’ll be chatting about:

📱 What’s the value of valuing your app?
📈 The CFOs Guide to Financial Modelling.
💻 Apple fan boy? Not quite, but not as unhappy as I thought I’d be.

Check out this weeks Primer where I get to know Martin Sibley and understand the challenges - and opportunitiy - in building businesses focussed on the market servicing disabled people.

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Now let’s get into it.

How can did I add value?

Valuation continues to be one of the things first time founders get their proverbial underpants in a twist about.

I recently talked to a founder who had asked for assistance on valuing their app.

Their accountant had told them it made sense to attribute a value to the cost of building the app on the balance sheet.

The founder wasn’t sure how to go about this, and assumed this would be necessary to raise investment.

Here’s what I learned pretty quickly after a few initial questions:

1. They had self funded development of the app for quite a bit less than £50k.

2. They weren’t going out for investment any time soon.

3. They were pre revenue, however had created a community app which they planned to monetise through an in app marketplace (tough).

4. They had a decent number of users (it was a b2b2c acquisition model in the education space - though not precisely edtech).

5. Their accountant had little or no experience in the tech space (and in fairness, the founder was pretty new to it all as well).

So here’s what I told them:

• From an accounting perspective, you would be hard pressed to argue a usable lifetime of more than 5 years based on current accounting standards.

• This is because technology moves so fast, that unless you can argue your IP is provably enduring, you’re not going to be able to carry it (leave it on the balance sheet and depreciate) for any length of time.

• That effectively means that, assuming a cost to develop of approx £30k, you would be charging the P&L with £6k per year until the app has been fully depreciated.

• Again, due to accounting regulations, you can’t add any intangible value (goodwill) to something you have produced internally. You can only do that if you acquire, say, another business whose assets are worth x and you pay x + 1,000. The 1,000 would be booked as goodwill as it is the value you have paid over and above the value of the assets.

• But a lot can happen in 5 years, and in the tech world, you don’t value any business (especially at the earliest stages), on the carrying asset value. You might do that for a traditional business with plant, equipment, debtors and creditors, but for a tech business it’s all about the future opportunity and how much you have de-risked the business.

• So the long and short of it was that I told the founder to ignore what their accountant had told them and not worry about trying to create a value for the app on their balance sheet.

• But, should they have wished to value the business, there would be ways of doing that if they were post revenue or, in the case of this pre revenue business, they may have looked at equivalent community apps (whatsapp?) and worked out the value per user using public information. They could then use that to calculate the business value based on the number of users currently on the product.

This founder was visibly relieved when I told them they didn’t need to lose too much sleep about this right now, as it meant they could focus on building out the app, acquiring users and building the community.

And let’s face it, that’s far more interesting than wrangling numbers on a balance sheet.

The long and the short of it is that you don’t need to overcomplicate your thinking or your business by trying to get cute with accounting.

The only time valuing your business really matters is when you are seeking investment.

And that value? Well that’s a negotiation between you and your investor, rarely a value that is set in stone.