Business valuation is not a straightforward task for any firm. Performing a valuation on young firms is quite a tricky and subjective game and it’s something that small businesses need to know how to deal with, especially when there is scarcity for investment capitals. Give a very low figure and you’ll simply give away your store; shoot high and investors could blanch at your grasp at the economics. Here are a few strategies to help you value your startup. The best bet would be perhaps an amalgam on all three factors. And when you talk about attracting investors, the more you speak their “lingo”; the better are the outcomes.
Asset Valuation
The asset valuation approach is perhaps the most concrete and accurate way. This technique outlines the dollar values on the assets on a balance sheet and then adds them up. You can begin with the physical assets like inventory, prototypes, office furniture, machinery and computers. Proceed with the valuation of your intellectual property which includes trademarks, patents and incorporation papers. The rule of thumb applied by many investors lets every patent filed justifies a one million valuation increase.
Don’t forget to include principals and workers. The value of many companies can be found in their workforce. During the Internet boom in the 1990s, valuations were raised by $1 million for each full time web designer, engineer or programmer. Customer relations are also worth something. Make sure you assign probabilities for every active customer. Ever customer contract is valuable.
Market Approach
You can also estimate your company’s value through its earning potential based on the theoretical market demands. You can begin by calculating the growth of your target market. Bigger markets mean higher growth projections. For startups looking to win big time investors, target should be $500 million in terms of potential sales. Assess your competition and know barriers to entry. The tougher the competition; the lower your firm’s valuation. The more fortified a company is against the competition; the more you increase its worth.
Income Valuation
This method is extensively used by a lot of financial analysts and involves projecting the firm’s cash flows in the future and discounting their value in present dollars. Discount rates for startups are usually steep—around 30% – 60%. The newer a company is, the greater its uncertainty of the earning power and the bigger its discount rate.
Just like artists, entrepreneurs need to be creative in valuing their startup company. If you think going all through these numbers sounds like much work—that is true. But would you rather easily give your store away?
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