Obtaining an accurate valuation of your business isn’t just about determining how much your company is worth; it’s about figuring out where your business stands today and the potential it has for the future. In this way, accurately valuing your company is a vital first step in growing your business and bringing on board investors who can help you do just that.
To ensure you’re taking the right approach with your valuation, consider this advice from the members of Young Entrepreneur Council. Below, they offer their top tips for determining your company’s valuation prior to fundraising and how doing so will set you up for future success.
Members pictured from left to right.
Photos courtesy of the individual members.
1. Seek The Help Of An Expert
Don’t do your own valuation—nobody will respect it. There are development shops that perform valuations when the company is pre-investment. Try them and then check it against the existing valuation ranges. Then, take your first valuation to a second group. The valuation is accurate if they sign on at the same valuation or a higher one. If three or more entities sign on at the same valuation, you are golden. A company’s valuation has no legal verification until corporate taxes are filed with the federal government. Use Revenue/EV and EBIT/EV multiples for the sector your company is in, as those are used to calculate your exit. If the revenue and EBIT in your financials match the valuation, people will listen. – Sean Adler, GZI
2. Take An Asset-Based Approach
The asset-based approach is one of the best techniques for determining the valuation of your company before any fundraising. First, you need to consider both the book value of your assets and the market value of them. The book value is your company’s net worth or shareholder’s equity, which includes direct investments and retained earnings. Now, you need to consider your company’s liabilities. The difference between these two values is the amount of money you will need to raise from investors—a clean calculation. This is where the asset-based approach delivers the exact information about your company that you need for efficient fundraising. It also helps you execute the market comparisons of your company’s net value. – Candice Georgiadis, Digital Day
3. Consider Your Churn Rate
To determine your company’s valuation prior to fundraising, it is important to look at a variety of factors, including churn. Churn can give you insight into how well your company is retaining customers and whether or not your product or service is sustainable in the long run. If you have a high churn rate, it may be difficult to attract investors because they will question the longevity of your business. However, if you have a low churn rate, it will show that your company is stable and has potential for growth. Ultimately, the decision of what valuation to place on your company prior to fundraising will come down to a number of different factors, but churn should be one of the key considerations. – Sujay Pawar, CartFlows
4. Look At Comparable Companies
Consider comparative valuation prior to fundraising. The first step would be finding competitors that are on par with the current valuation of your business. The second step would be exploring if any of those competitors have recently been funded. The third step would be to draw an estimate of your potential funding. This is one of the methods that businesses can consider to explore the company’s value while raising capital. – Stephanie Wells, Formidable Forms
5. Determine Your Revenue And Expenses
The first consideration for figuring out your valuation is your revenue, or how much money you’re bringing in from customers and clients. This will tell you how large of a market you’re addressing and can help give you an idea of what level of investment potential you have. Another important consideration is the cost of running your business, including both fixed costs like rent and utilities, as well as variable costs like salaries and marketing expenses. With this information in hand, it’s easier to get an accurate picture of your profit margins and where there may be room for growth or improvement—and you’ll have a fairer idea about how to value your business. – Syed Balkhi, WPBeginner
6. Leverage Your Network
No matter what industry you’re in, networking is crucial for success. Talking and socializing with other business owners will open many doors for you and get you vital information. Brush up on your social skills and talk to investors and fellow entrepreneurs who don’t have a stake in your company. They are sure to be objective. Dig deep and note their practical remarks and comments about your company’s status and valuation. Some of them may have insights into what potential investors may think about your enterprise. Industry experts with similar experiences in valuation and fundraising can also provide input on how you can boost your company’s value. They can also provide practical situational analyses for how much money you can raise based on your industry standing. – Bryce Welker, Crush The GRE Test
7. Use The Discounted Cash Flow Method
One top tip for determining your company’s valuation prior to fundraising is to use a method called the discounted cash flow (DCF) method. This method takes into account the time value of money, which means that cash that is received today is worth more than cash that will be received in the future. The DCF method is a reliable way to estimate the value of your company and its potential for growth. The DCF method discounts each future cash flow by a rate that reflects the investment’s riskiness so that riskier investments have lower values than less risky investments. The DCF method is commonly used by financial analysts and investors to evaluate stocks, bonds and other types of investments. You can always hire professional help if you need to do it in a scientific way. – Kelly Richardson, Infobrandz
8. Consider A Realistic Time Frame
When determining your company’s valuation prior to fundraising, make sure that you’re considering a realistic time frame. Of course, every business has its own life cycle, but it’s important to consider how much time you have left before your business reaches maturity. If you don’t have enough time, it may be better to wait until after you’ve reached that point before going out for funding. – Brian Greenberg, Insurist
9. Factor In The Product-Market Fit
The most important thing to focus on when determining your company’s valuation prior to fundraising is ensuring that you have a strong product-market fit. This means that your product or service is appealing to a sizable market and that there is a demand for it. Investors will be much more interested in investing in a company that has a product or service that is in demand and has a large potential market. The next step is to assess the size of the market. This can be done by looking at factors such as the total population of your target market, the number of potential customers and the growth rate of the market. Once you have a good understanding of your product-market fit and the size of the market, you can then start to come up with a valuation for your company. – Abhijeet Kaldate, Astra WordPress Theme
