We get asked a lot about how to value companies, particularly start-ups and companies that are very young and/or pre-revenue or not making a profit.
This is a tricky area and ultimately the answer is, of course, that it’s worth what someone is willing to pay – though that sometimes depends on what you’re willing to ask!
I ran across a great article on www.StartupventureCapital.com that runs through 9 popular valuation methodologies in simple language that’s easy to understand, if not necessarily to apply.
In my experience, the Discounted Cash Flow (DCF) and Comparable Transactions methods are by far the most persuasive, being based on the most comprehensive data.
DCF tends to be a somewhat complex exercise in forecasting, but that’s something you really need to do anyway, just to understand the strategic future of your business.
Comparable Transactions requires doing a bit of research and making some educated guesses, but this is often the most persuasive of all, as buyers like to know that they’re following in others’ footsteps.
Even if you’re not looking to sell your business or take investment any time soon, it can be a valuable exercise to run through the valuation models to understand what you should be doing to prepare for the day you do want to sell!