Any new business needs to be valuable to get an estimated cost and fund that it requires to capture markets, produce goods and create brand value and a prominent position in the market. To indulge in different deals, it is necessary to make sure what the opening value of the company is. The owners of the company partners shall critically think about what fund is necessary to start the business; they should make sure not to undervalue or overvalue the estimated figures. So here, a question arises, what are the crucial steps that a start-up owner shall keep in mind while evaluating his start-up?
What Is Start-Up Valuation?
Valuation of the start-up is referred to the estimated valuation of funds that the new business requires initially for its financing, management, and sales. The estimated valuation of the company helps it to foresee future risks involved and anticipated growth. The Start-up valuation process usually involves creating a simple frame out of business without hailing it to be super complex. This helps start-ups to re-strategies their plans and correct them if any is needed.
Also, it is important to value a start-up business as the partners may have to pitch for a business idea to the company’s investors so that they can analyze the potential return on their investment and the future profits. It is an excruciating part for the owners as what to spend and how much to spend can require a lot of brainstorming to invest, ideally into the company’s growth.
10 Helpful Start-Up Evaluation Method
Here are 10 extremely helpful start-up evaluation services that will help you estimate the company’s potential earnings.
1. Berkus Method
Since valuing a company could be a very risky and challenging venture, the Berkus method is like spoon-feeding new entrepreneurs early to warn about the future risks. This method allows budding start-up owners a ready-to-use framework that lets me see the potential risk factors involved to estimate the pre-revenue start-up. The method assesses the following basic but necessary factors:
- Basic value
- Strategic relationships
2. Book Value Method
It is also known as asset-based valuation. This method lets you compare the estimated value of your start-up with your actual valuation. With this method, the discrepancies in the valuation could be corrected without risking much and future accruing losses. The book value of a start-up can be calculated by total assets-total liabilities, i.e. by summing the company’s total equity capital and dividing it by the number of outstanding shares.
3. Comparable Transaction Method
The comparable transaction method gives you room to compare the value of your start-up with those similar to yours that have been acquired in recent years. It substantially works as a precedent. This helps you to determine and decide an appropriate value range. The method is best suited for companies from similar niches, selling the same category of products or selling comparable products.
4. Cost-To-Duplicate Approach Method
This approach enlightens you about how much funds would be required for someone to replicate your start-up somewhere else than the domestic country/city it is currently located in. To avail, this valuation method adds up the estimated brand valuation in the fair market, tangible assets, and the patents the company holds.
5. Discounted Cash Flow Method
This method involves real market analysis to predict how much profits the start-up will accrue in the future. This method is really helpful for beginners as it can estimate the company’s investment return rate, revealing its true potential to grow and produce with available resources.
6. First Chicago Method
This method gives you predictions for different possibilities and outcomes that a start-up can have. The three possibilities that the method predicts are the best potential of the business, the average, and the worst-case scenario that can happen. This method is helpful if you have a large number of investors to pitch to, as this will give them a sight of the growth points of the company.
7. Future Valuation Multiple Method
The future valuation method estimates the return on investment (ROI) of the company shortly. These estimated projections may consider the sales or growth aspect.
8. Risk Factor
The risk factor method allows you to see the success probability ratio for your company. It, in total, uses 12 different factors to make predictions for the same.
9. Scorecard Valuation
This method is an innovative way to value your company. It allows you to compare your start-up idea with different companies in your niche, your area, and in different aspects.
10. Valuation By Multiples Method
This method uses the earnings of the company as an indicator to create the value of the company. Using the company’s current earnings before deduction of any taxes, depreciation, and amortization, the evaluators can get true and current figures of the company. Investors can easily predict future growth with figures.