How to value your startup

Today we are going to talk about what is the appropriate valuation of your business. The answer is quite simple: like for anything, your business is worth what somebody is willing to pay for it.

First of all you must understand that the methodologies applied by one buyer in one industry may be different from the methodologies applied by another buyer in another industry.

The valuation techniques

1. You should consider the financial projections of the plan business, in other words, based on mathematical calculations. For instance, investors will study things like: revenue, cash flow or net income multiples from recent financings in your industry;  revenue, cash flow or net income multiples from recent M&A transactions in your industry; a discounted cash flow analysis of forecasted cash flows from your business.
2.    If there are no earnings yet, with your business plowing profits into long term growth, then revenue multiples or some other metric would be used. What you do is calculate a ratio based on the value of the company and the selling. You multiply this number by the sales of your company.
3. You can use alternative methods, for instance: if the entrepreneur has failed or not,  if it is a team or Lone Ranger.

Rule of thumb

At the end of the day, the investor will have a very good sense to what a business is worth, and what they are willing to pay for it. As they see deals all the time and typically have their finger on the market pulse.

So, collect a few term sheets from multiple investors, and compare and contrast valuations and other terms, and play them off each other to get the best deal. As a rule of thumb, expect to give up 25 to 35 percent of your equity, in each equity financing you make.

Have a good Saturday!

GlobalOrg