How to Calculate the Value of Your Startup
posted Jan 29, 2014 by Anthony Mangiarelli, CPA in the Business Blog
When entrepreneurs are trying to get their startups off the ground, they’ll inevitably run into a point where they need some sort of outside funding. Knowing how much the business is “realistically” worth is critical throughout the various stages a new entity goes through from inception through maturity. A proper valuation will assist a business owner to determine how much additional money they need to scale timely and also help them calculate how much ownership they’ll need to give up to secure funding. Remember as a new entrepreneur, you do not want to leave value on the table and at the same time you don’t want to be laughed out of the room.
Although it can be difficult to determine precisely how much a startup is valued at, there are specific metrics that business owners can look at to get a ballpark number. Here are three tips that may help you calculate the value of your startup:
1. Look at the market to determine earnings potential
Unless you are proposing a completely revolutionary, never-before-seen product or service, there is likely another company in the world that you can use as a benchmark to approximate your earnings potential. Take into account factors such as the size of the industry, how much others are earning per year, your target audience and your geographic location.
2. Understand the value of your assets
Asset valuation should cover everything a company owns, ranging from inventory to machinery and equipment to intellectual property (such as patents and trademarks). All of these different assets can add up and may convey just how valuable a company is to investors.
3. Understand how your company earns revenue
If your company has entered into contracts whereby it will collect future revenues, many investors will value a company by discounting these future cash flows to arrive at a current valuation. It is appealing to investors, and will increase your valuation, if you have cash that is contracted to arrive in the future and you can increase revenues or profits of the company if you have the cash today.
Determining the value of a startup is a crucial milestone in the life of any company, so entrepreneurs should always have that important step on their radar. There are several experts who can help entrepreneurs estimate how much their companies are worth. Need help valuing your startup? Contact the KLR Startup and Emerging Business team.