How To Define The Worth Of A Startup

 

Defining the worth of a business startup is not a complex procedure. When determining the worth of a business, an appraiser calculates the market value of a venture. Determining the worth of a startup entails looking at its assets, income, and share market.

Here are the methods of defining the worth of a startup:

Classical Methods

Net Asset Value (NAV)

Under this method, the value of a startup is calculated by considering the company’s assets and liabilities. The method is best suited when determining the worth of equity-intensive industries where assets and liabilities can be easily summarized. Since most startup assets are non-existent, this method is not suitable for valuing startups.

Net Present Value (NPV)

The net present value is determined by computing a company’s discounted cash flows. A business’s future cash flow is predicted before adjusting the tx on the discounted capital at the date of the company’s valuation. However, it is not easy to determine the future value of a business. The method is based on assumptions of the projected value of the business at a future date.

Reproduction Cost

It is an efficient method of defining the worth of a startup. When using this method, you define the total cost it would take to build such a startup from scratch to the present date. The total cost provides the worth of a startup.

Ratchet Clause Method

Under the ratchet clause method, a startup and its investor agree to tie a venture’s value with the business targets. It is a practical method for getting the company’s value when negotiating with an investor. The advantage of this method Is that the company is given a worth with the highest value possible.

How to Value a Startup to Define its Worth

Cost-to-Duplicate Method

As the name suggests, this method values a startup by comparing the amount it would be needed to establish another similar venture. The method ensures that the investor does not pay more than the actual value of a startup. When using the cost-to duplicate method, the value of the physical assets is calculated. However, when dealing with a software company, you will be required to determine the cost of prototype, patent, development, and research. The method is fairly objective since its calculation is based on real companies’ verifiable records and historical data. However, the method cannot guarantee the business’s future return on investment, profits, or sales.

Market Multiple Method

Potential investors mostly prefer the market multiple method. It provides a business value based on the recent acquisitions of the same ventures in the industry. However, to value a business in its infancy stages, its business model and extensive research must be carried out. The only problem with this method is that few companies find close comparisons, especially in the early stages.

Discounted Cash Flow Method

It is the best method to find the worth of a business that has not yet started generating any earnings. Discounted cash flow method predicts the amount of cash flow a company will make at a future specified date. By calculating the investment return, a startup worth will be easily determined.

Valuation By Stage Method

The method aims at establishing the range of business value based on its progress in its startup phase. It provides rough and quick estimates of a startup’s valuation. The development stage method is mostly preferred by venture capital firms and potential angel investors. Valuation by stage method evaluates the business idea, management team, technology, customer base, and profitability of a startup. It is the best method when valuing the worth of a venture that has reached a certain milestone in development.

Conclusion

It is essential to define your startup’s worth when trying to raise capital. If you are looking for angel investors to help you get your company off the ground, defining its worth is not an option. It is also important to find your startup’s worth if you consider selling your business idea. Since defining a business worth requires financial knowledge such as amortization, interests, depreciation, and various taxes, it is best to assign your valuation to a competent analyst. Wiley Financial is a certified financial analyst that provides reliable, accurate, and timely calculations of startup valuation in San Diego and the larger California. Contact us today for an efficient appraisal and precise definition of your startup worth.

Original Source: https://wileyfinancialinc.com/how-to-define-the-worth-of-a-startup/