Of all the work I do, valuing companies in creative environments is undoubtedly what I like the most. A little further down we will see what «valuing» in this type of company means.
What do you want to know the value of a creative company for? Fundamentally for three things:
/ To look for partners because they need capital, but without losing control and knowing what they are worth,
/ To sell it, and
/ To chop up internally generated creative processes that can be sold to another company, because otherwise they die.
#1 The first question you may be asking yourself is, what is a creative company?
Without resorting to any manual or agreed definition, in my experience, a creative company is one that innovates by creating new solutions. It doesn’t have to be in the technology or digital sector, although it is increasingly common for it to belong to these sectors to some extent, it can even be a traditional company, there is a bit of everything.
Creativity, along with time and energy, are the great scarce resources. All three have always been scarce, but creativity is increasingly important in a more technological, interconnected, automated and noisy economy; where everything is industrialised and packaged, it will be more necessary than ever.
We are talking, for example, about digital creative agencies, sensory experience agencies, talent ecosystems, databases applied to new uses, branding in different environments, emotional intelligence, design in all its aspects (including graphic design) and new industrial processes.
One of the great paradoxes of the new economy, of the new economic paradigm that we are living and will live in until the end of our days, is that craftsmanship will be increasingly important; in the assessment processes, greater understanding is required of market risks, of the uncertainty of ideas and of the symbolic languages that define the meaning of solutions; that which they call narratives, but which is mythology 2.0.
In an increasingly robotised business environment and processes, more understanding is required of the qualitative, of the intangible… that is why the ability to create value for companies comes increasingly from the intangible or from these traditionally called «imponderables» that we try to weight in numbers, in economic and financial value.
#2 The second question you may have asked yourself is; what do you mean by «how much is it worth»? Its financial value.
Everything can be valued financially, everything has a value. What is different is the degree of uncertainty in that valuation; on most occasions it can be done quite accurately, but there will be times when the degree of uncertainty is so high that its reliability will be low or we will have to leave it at an «approximate notion».
In the end, everything has a material correlate, because we materialise everything, either directly or indirectly.
The valuation of creative companies, until now, had to choose between two opposite extremes that cannot provide an answer to what is needed:
(i) Yuppie world of startup valuation.
ii) Traditional corporate world
The valuation of the former often lacks rigour or does not correspond to real expectations (or the uncertainty is so high that it should not be valued at all). The traditional valuation world is much more rigorous, but it is not capable of valuing creative companies except in phases of maturity because the financial statements are stable, in which case we begin to talk about another type of company.
Between these two extremes, a whole window opens onto an exciting world that requires technical rigour, but also knowledge of other areas and, in turn, a creative capacity in financial valuation itself.
A creative enterprise is worth its lifetime cash-generating capacity (the free cash it leaves), computed at present.
Creative businesses in the 21st century require an advanced knowledge of accounting. This is the first point; accounting is a language and like all languages, it requires a deep knowledge that, corresponding to an established body of rules, must have been used, constructed and analysed in many different circumstances and challenges. We are not talking about making the usual entries. There is so much more.
Just as there is a creative strategy, a creative framework, and a financial framework must be developed; creativity and innovation should have (at least analytical) accounting recognition.
Here the creative enterprise is losing a lot of value because the value it is creating is not reflected.
The uncertainty of the model itself, of the solution. In an interconnected economy, with the capacity to absorb new proposals, global competition, we must value thinking about multiple scenarios, thousands of them; the future is open and, beyond limiting it, we must test it and see what can happen. Valuation models must be open and adopt advanced statistical techniques.
#3 Some final questions
We have to ask ourselves questions like: how does it reflect my company….?
… its research and development process?
… its ecosystem?
… its community of users who in turn add value?
… the skills and talent of my employees?
Note: I’m developing an index of creative small and mediium companies (her momentum, valuation…) Do you think its intereseting? you can contact me. I’ll be happy to tell you more about it and listen to your feedback.