Understanding the value of your startup is crucial for every stage of running your business. When it comes to selling your startup, knowing its worth is the key to getting the best deal possible. Every business is different and there are lots of variables that can affect the worth of a company on the market.
At NorthStar Venture Partners, one of the most common issues our clients face is a misunderstanding of the value of their startup. That’s why we’ve put together this startup valuation calculator to help you get a handle on what your startup is worth.
Valuation Methods for Startups
Let’s start with some of the most common valuation methods for startups. Startups can be challenging to value properly because they may not have the steady revenue of established businesses. However, there are several methods that are popular.
- Cost-to-Duplicate. This first method is almost always a good jumping-off point because it calculates the money you’ve spent to build your business. It’s based off of your expenses. Using this method, you’ll need:
- The total you spent on physical assets, including inventory, office equipment and supplies, and any other physical assets you’ve acquired.
- The total you spent on research and development, including market research, product development, programming, and testing.
- Market Multiple. Another common method is to look at what other companies like yours are selling for and using that as a guideline. There are many different models, but for example, you might learn that startups in your sector are selling for a multiple of their annual revenue. You could use that as a basis for your business valuation. Keep in mind that this option may be tricky if there are few companies like yours that have been sold.
- Valuation by Stage. This method is less about the specifics of your company and more about where it is in its development. For example, a business whose only asset is a great idea will be worth significantly less than one with a great idea, a successful product, and an established customer base. This method is one we like because it acknowledges the work and time entrepreneurs have put into their businesses even if the sales aren’t high yet.
- Discounted Cash Flow. One of the frustrating things for startup owners is that sometimes, acquisition offers don’t match up to the owner’s projections of what the company can do in the future. The discounted cash flow method works by predicting future earnings and using them as the basis for a company’s value. It’s very rare for a company without an established product to use the DCF method to arrive at a value.
As a rule, the less time and money you’ve put into a business, the less money it is worth. However, there are exceptions. A startup with a brilliant prototype could sell for far more than its Cost-to-Duplicate if the buyer believes they can make a killing on future sales.
Steps to Help You Properly Value Your Business
We can’t tell you which valuation method is best suited to your business, but if you’re not sure, here’s what we suggest, step by step.
- Start with the cost-to-duplicate method. It certainly doesn’t make sense to sell your business for less than you’ve put into it. If you don’t already have a handle on your expenditures, including time and money, now is the time to figure it out. Once you have a total, you can use it as a minimum baseline for your business valuation.
- Do some market research. Are there other companies like yours that have been acquired? If so, how much did they sell for? The more information you can gather, the better off you’ll be. We suggest organizing what you find in a spreadsheet so you can manipulate the data if you need to.
- If you have existing clients, calculate their future value to your business. You can do that by starting with their sales in the current year. Project future sales and assign probabilities that each client will fulfill their potential based on your projections. Then, add everything up and subtract your overhead expenses, including your salary and other items, to get an idea of your future revenue.
Keep in mind that any projections you make about the future earnings for your company are just that — projections. We suggest coming up with a range with a conservative estimate on the low end and an optimistic estimate on the other end. The truth will probably be somewhere in the middle.
Of course, this method won’t work if you don’t have any existing sales. If that’s the case, take any market research you’ve done for your prototypes or patented products and do your best to estimate the market demand and future sales. It’s likely that any buyers will be conservative in their estimates, so keep that in mind when you do your calculations.
Valuing a startup business is tricky at the best of times, since anything beyond a Cost-to-Duplicate calculation is going to involve some projections and guesswork. If you’re not sure where to start, you may want to consider hiring a pro to value your company.
Need assistance figuring out how much your startup is worth and if it’s the right time to sell? Click here to apply to work with NorthStar Venture Partners now!