Value a Startup Business Using Best 6 Approaches – Knowing how much a company is worth is crucial, particularly if you want to pitch it to potential investors or apply for a small business loan.
On the other hand, new business owners pay careful attention to their company’s valuation to ensure that they’re building a valuable company to raise more money as they grow.
Here are five fundamental approaches you may use to calculate the value of a startup business.
We provide customized professional valuation services to our startups’ clients based on their suitability and needs to raise funds quickly with the target investors.
– Valueteam
1. Value a Startup Business in Berkus approach
The Berkus approach is a quick and easy way to figure out how much your startup is worth. The starting point is this: do you think the startup will generate $20 million in sales by the fifth year of operation? If you answered yes, you would evaluate your startup using the five main five critical success factors for constructing your startup, including primary value, technology, and execution, strategic partnerships in its core market, production, and subsequent sales.
A thorough analysis is carried out to determine how much value the five main performance factors contribute to the enterprise’s overall value in quantitative terms. The startup is priced based on these figures.
2. Value a Startup Business in Market Multiple approach
One of the most widely used techniques for valuing startups is the Market Multiple approach. The Market multiple approach functions in the same way as other multiples do. Recent business acquisitions of a similar nature to the startup in question are considered, and a base multiple is calculated using the valuation of the recent acquisitions. The startup is then priced using the business multiple as a starting point.
3. Value a Startup Business in Cost-to-Duplicate approach
The Cost-to-Duplicate approach requires you to factor in all costs and expenditures related to the startup and product creation. This includes the purchasing of physical properties. These costs are considered when determining the startup’s fair market value depending on all of the expenses.
4. Value a Startup Business in Future Valuation Multiple approach
The Future Valuation Multiple approach focuses on predicting the return on investment that investors can expect in the immediate future, say in the next five to ten years. For this reason, several forecasts are made, including five-year revenue projections, growth projections, cost, and expense projections, not to mention and the startup is priced based on these future projections.
5. Value a Startup Business in Risk Factor Summation method
An approximate initial value for the startup is determined using the Risk Factor Summation method. The effect of various types of business risks, whether positive or negative, is factored into this initial value. A calculation is deducted or added to the initial value depending on the risk’s effect. Some of the risks you may include Management, political, manufacturing, market competition, investment, and capital accumulation, technical and legal risks.
6. Value a Startup Business in Discounted Cash Flow method
The Discounted Cash Flow method focuses on forecasting potential cash flow movements for a startup. The “discount rate,” or rate of return on investment, is then calculated and used to calculate the value of the expected cash flow. Since companies are still in their early stages and investing in them carries a high risk, a high discount rate is usually applied.
Understanding startup business valuation
Accurately valuing a startup could be a very difficult task because as an upcoming venture it has no operating income or any salable product yet. But then how do you value a startup business?
In the most general sense, startups are new business enterprises that were set up by an entrepreneur. These business venture owners are focused on developing and introducing unique ideas and technologies into the market as new products or services. Typically, entrepreneurs value their startups when putting up capital or when shares are being given to their team, board members, and advisers. They look up to investors to get the much-needed capital that would enable them to get their business off the ground level.
While there is no exact proof yet to determine how much money will be needed along the way, certain industries and sectors have what they would look out for. Hence the importance of involving professional financial analysts in your business valuation approach as there are several methods of business valuation available for their use and they know best how to determine valuation of a business. As a startup business founder, it is important that you also understand how the different types of business valuation methods work and ask yourself “what valuation method for valuing my business will work well for my startup?”. Overvaluing your startup would likely result in you not getting any money from investors. On the other hand, undervaluing your startup means you’re giving out much equity for a less amount and at the same time devaluing what you’ve established so far.
Having an accurate valuation startup and using the right approach in business valuation is critical. The valuation of a startup will indicate what its value is at a given point in time. The commonly accepted different types of business valuation methods employed by business valuators are within these three approaches: the income approach, the asset approach, and the market approach business valuation. The main point is that it is a lot more difficult to get an accurate valuation of a startup as it is impossible to know whether or not it will be successful in the future. Nonetheless, the approaches mentioned above will help put it out in a more scientific way.
The final step to understanding the valuation of your business has something to do with the approaches applied in determining your company value including the discounts made to achieve the absolute value of the interest. In as much as the overall conclusion of value is based on the impact made by the application of the different valuation approaches, the concept of “what you put in, is what you get out” can still play a major role in the process. That is to say, if the projected financial information of a company is not credible, this step may still be inaccurate even when applied rightly.
Please note that these startup valuation approaches are very complex and best approach depends stage of the company.
- Areas of focus.
- Various metrics.
- Taxation.
- Revenues structure.
- Investor appetite, and many more factors.
We provide customized professional valuation services to our startups’ clients based on their suitability and needs to raise funds quickly with the target investors.
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