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Valuation lessons from Pokémon Go

John Mickelson, managing partner at Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. MGP intern Anthony Yang, a junior at the University of Iowa, also contributed to this article.

Like music written after the Napster era, Facebook, and skinny jeans, I am apparently being woefully left out of a new cultural phenomenon: Pokémon Go. As I have read in newspapers (yes, I still read the hard versions), this craze is infecting the nation and has whipsawed the valuations of its parent companies. 

But underneath the appalling stories of car accidents and trespassing lawsuits, there is actually a pertinent message about your business valuation as you consider succession planning strategies: ASSUMPTIONS MATTER!

Earlier we talked about key factors that impact valuation, but we did not discuss the intricacies of determining the valuation itself. Valuation is driven by a set of assumptions that business owners should realistically consider as they contemplate what their business is worth. One tiny change can make a big difference among the investor community.

So what does this have to do with our battling cartoon monsters? Well, let’s take a look at what happened to Nintendo, an owner of the Pokémon Go app. When the app was first released, 80 million people downloaded it within days of its launch and Nintendo’s market value shot up $7.5 billion. Mr. Market said: "80 million people! Think of the advertising! Imagine the data collected! A way to engage millennials!"  

But once Nintendo announced that they would not profit from the app as much as anticipated regardless of how many players they had, their value dropped by a hefty $6.7 billion. Ouch. A small change in investor assumptions had a huge valuation effect for Nintendo.

Of course, your business will not have nearly as dramatic of fluctuations, but the story serves as a good reminder about how finicky valuations can be. Simply assuming that your valuation will always stay constant, or steadily increase, rather than constantly validating the drivers of the underlying assumptions can get you into trouble when it is time to sell.

Is your biggest customer always going to stay with the company, or could they look for other alternatives?

Is your best salesperson planning to stay forever?

Is your technological advantage IP protectable and relevant for the foreseeable future?

So what can you do to ensure that you get the best valuation possible? Business growth and adherence to the factors mentioned previously will both yield a higher valuation, and you should also constantly challenge the underlying assumptions of your business -- because your buyer definitely will!



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