So you’re getting ready to present your pitch deck to some glowing investors, however, you are missing one key component, your startup valuation! We’ve all seen plenty of startups quickly value their own startup in the millions very quickly (and without any evidence why). If you’re stuck and not sure where, to begin with accurately valuing your startup, check out our top 5 tips:
1. Get your Balance sheet in order
First things first, you have to keep track of all your expenses, and this means opening up a business account. This can be quite challenging for many aspiring entrepreneurs. So first things first, register your company with Companies House. Secondly, get your business registration number. Thirdly, open up a bank account. And lastly, get an online bookkeeping platform to help you stay organized with all your expenses. From there you can move on to tip 2 to 5 in which we will describe to you the different methods. This can determine the valuation of your startup. Some can be done independently and others will require more than one method. So carry on and let’s see how to best evaluate your startup.
2. Get your Balance Sheet in check
With Tangible Assets
The most straightforward way to get your balance sheet in check is to mainly add up the value of the business assets and subtract its liabilities to get the starting value. Then with your knowledge of the market, adjust the value of the assets and liabilities. Assets your startup already owns can be quite small, since they most likely are computers, web domains, and any current cash on hand. If you have paid for any sort of dev work and basically any other expenses, that can be included as a liability. You then have to add up the value of both the liabilities and assets, then you will have a value from which you can work on. This method is actually called the adjusted net asset method.
Be Sure to Calculate and Include Your Intangible Assets
Intangible assets are hard to calculate but they can be plentiful and can become quite significant for a startup. For example, brand name, trademark, an email list, a good ranking in search results, positive customer reviews, and/or an organic social media following that is large and engaged, can all help to give a substantial value to your company.
These will not necessarily go on your balance sheet but they can add value to the total startup valuation.
3. Earnings
This method is pretty straight forward, basically any cash flow that your company has since its inception will obviously be noted for one one year and divided by the “capitalization rate” (business’s expected rate of return not including salary of owner, usually 20% to 25% for small businesses). This will give a good view of the expected value that your company gets within that one year. This method is called the Capitalization of Cash Flow Method (CCF).
4. Future projections
In this method, you have to try and calculate how much money you will make in the future. This method is good for companies that have a steady cash flow and require more calculations, but here is a handy calculator to help you with everything. You will have to know a little like your weighted average cost of capital (WACC) or discount rate.
5. Recent sales of similar businesses
This method can probably be one of the sneakiest (but important!) methods of calculation. Since you can spy on your competitors and see what they value their businesses at. This type of info can be taken from a database where you can see if competitors have been sold. Or more money has been invested into them. Once you have this data you can then make an educated guess by either adding or subtracting from that valuation. This can be done with the help of either your earnings, projections, tangible and intangible assets.
This is our best method of calculating your startup’s valuation; seeing your competitors valuation and from there adjusting your own valuation based on educated estimates. It is good to know what method you plan to use in order to come up with your valuations as it is very common that investors or buyers will ask what method you used to determine your total business valuation. Also remember, you can find expert appraisers online that can do all of this for you, for a fee of course. So there is that route if you are completely lost, but we believe you can do it! So good luck and we wish you the best in calculating your startup valuation and we at EC can always help!