Start-up valuation as the name suggests, is how much your business is worth or valued. It is an exercise that every business needs to carry out sooner or later. Understanding the overall value of the business is essential when you are looking to sell the business or raise funds from investors.
Since this is a crucial calculation that could be a turning point for your business, working on it will require you to be creative and think outside the box.
Here are some points that you must know about the valuation of your business:
- Valuation has a different meaning for different purposes:
In case a business is valued for legal purposes (divorce settlements, calculation of taxes for inheritance or gifts, etc.) a certified professional will analyse only financial statements. This will mostly be a guesstimate.
Secondly, it will be valued differently by business brokers if it is up for sale. This calculation will depend mainly on the industry you operate in.
Thirdly, it will be viewed in a different way with regards to a proposal for investment. This will involve difficult negotiations with the investors to get you the highest value and the investor the best deal.
- Your business is worth what the buyer thinks it is:
This is the reality which many entrepreneurs find hard to accept. No matter how much you value your business, it is worth only what someone else is willing to pay for.
- There are guidelines and basic rules to help you:
There are various sources online that can guide you to follow the rule of thumb, business brokers or investors use, to calculate start-up valuations. Depending on the type of your business, valuations would be a fraction of your sales and inventory while considering pluses for growth and negatives to account for risk.
- Negotiation can get you to a win-win situation:
Tackling tough conversations and honing your negotiation skills can help you more than you think!
Plan in a way that you can justify each point in your business plan and how you concluded on the valuation figure. This will also add to your credibility to show the investor you know where you’re going and how you plan to steer your business through to success.
- High revenues or traction doesn’t really guarantee high valuation:
Sometimes investors might be willing to bet high on companies with a great idea, super management team and even no sales record! But the same investor might be more cautious with a business that has done fairly well in the whole of its existence. Ironical, but true! Investors have many more factors to think about and might even get sceptical in their approach.
Nevertheless, creating the best impression about how you have derived the valuation is in your hands. A great piece of advice given by Jack Dorsey, co-founder of Twitter might help you craft your valuation to perfection!
“Make every detail perfect and limit the number of details to perfect.”