If you haven’t yet considered getting a valuation of your startup–it’s time. Think of a valuation like an umbrella. You don’t need it all the time, but when you do it can be a lifesaver. So, whether you’re thinking you might sell, want to be prepared, or aim to attract potential investors, finding out the value of your business isn’t a bad idea. Don’t know how valuations of startups work? Here’s a quick guide.
Step 1: Size yourself up.
It’s time to break out that balance sheet and list out your assets. While your cash flow is the only thing you’ll truly be able to nail down (in terms of value), it’s important to list out all assets as they can be used for comparables against other similar start-ups–think employees and partnerships.
Getting an idea of what you’re worth includes the three heavy hitters:
- Revenue– Your overall income before expenses.
- Growth Rate– Ideally, 20%+ per year but can vary on an industry by industry basis.
- Net Income– What you’re left with after expenses, cost of goods sold, interest, and taxes. Again, margins are anchored by industry. For example, grocery stores historically have low margins and aren’t comparable to SaaS companies. A marketing agency, however, would want 20%+ margins in order to be competitive in an exit.
Step 2: Determine the best method.
There are many different methods to valuations, depending on company size, goals, and industry.
An early-stage valuation
If you want to have an idea of what your valuation is but aren’t in urgent need of exact numbers, the Comparable Pricing Method is a great option. Essentially, you just find a company similar to yours in terms of growth, revenue, and size and use that as a baseline number–or guesstimate.
For angel investors
Much like the Comparable Pricing Method, the Scorecard Method evaluates how you stack up to other businesses like yours. The difference is, it considers more “in the weeds” details such as your competition, the strength of your team, and the marketability of your product/service.
The “lowball” estimate
The Cost-to-Duplicate Method is essentially what it would cost to build the clone of your company from scratch. It puts a lot of weight into physical assets to determine fair market value. This calculation is undeniably better for the investor because it takes no future opportunities for revenue and growth into account meaning your startup will be valued lower than it’s worth.
Looking to the future
The Discounted Cashflow Method (DCM) tries to determine the value of a startup today based on future projections. This method is generally used for those wanting to invest in the company, acquire the company, or purchase stock. It can also be used by you for budgetary purposes like expanding or making large purchases. The major downside is that you don’t really know how accurate the valuation is since it is based on the unknown.
Step 3: Pre-Money Valuation vs. Post-Money Valuation
When determining your value, it’s important to know what it is pre-money vs. post-money:
- Pre-money valuation– The value of a company before external funding or financing.
- Post-Money Valuation– The value of a company after external funding or financing has been added to the balance sheet.
While the numbers aren’t complicated to understand, it’s the strategy that means something–it’s about your appeal to investors. Pre-money valuations are more complex and can fluctuate depending on things like employee share open-plan expansion, debt-to-equity conversions, and pro-rata participation rights.
With that said, pre-money valuation is still the more popular of the two. This is because it provides more insight to investors and gives them an idea of the value of the potential shares issues.
Step 4: Ongoing valuations
If you’re looking to really stay ahead of the game, consider doing a monthly/quarterly/annual valuation of your business. This doesn’t have to use a granular method, instead view it as just keeping the pulse of your company–a back of envelope equation will suffice. For example,
- Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) – (cash and cash equivalents)
- EBITDA = Earnings Before Interest + Tax + Depreciation + Amortization
Revenue Multiple = EV / Revenue
- EV (Enterprise Value) = Equity Value + All Debt + Preferred Shares – Cash and Equivalents
- Revenue = Total Annual Revenue
Step 5: Don’t go it alone.
Consider leveraging the expertise and knowledge of those who have done this before. Why not? It’s about ensuring that the worth of your company is as accurate and fair as possible. Involving an M&A advisor or an investment banker to determine your valuation is a great way to ensure accuracy, but it’s not the only option.
You can absolutely do the valuation yourself but it’s important to lean on the support of those who have been there. growth10, for example, is a community of entrepreneurs who have been there. They can provide insight into the process and make suggestions based on their collective experiences. Have a question? Post it on one of the groups’ social pages or participate in one of their many workshops. An easy start–read founders Tom Healy and Joe Buzzello’s book “Entrepreneurial Landmines.”
It covers everything from hiring, to strategy, to scaling quickly, and valuations. With the help of the growth10 community, you’ll be able to have an accurate valuation of your company without the headache.