Business is very tasking and one of the difficult aspects of it is arriving at the right valuation for the company. Valuation is any amount of value placed on your business that your company and your investors agree it to be.
Knowing what your business is worth at an early stage is often difficult. Without having financial data to rely on, except on investors, you have to create ways to substitute this.
As a Startup, you will get to a stage where you think of your companies valuation. The valuation of the company is determined by the market forces within the industry and set-up, the willingness of an investor to pay a bounty to get into a deal and the level of the entrepreneur, looking for funds.
For investors to pay for company valuation, they look at your environment and the competitors, no matter the success of the company at that time.
The value will be reduced, unless the investor hears about a future potential market shift, or, is just willing to believe the company will get better enough to shift the market favorably in the future.
As an early stage company, trying to know your company valuation, there are some criteria to guide you through and some of them are as follows:
Here, you compare your transactions with those that have been in existence in the same business line. If those businesses have been sold, or, still standing, then, that will stand as an initial negotiation benchmark.
It is more useful, when you have so many businesses to make your comparison with, the stronger your negotiation, the better for your company’s valuation. This method assesses your extrinsic value.
Discounted Cash Flow
This method looks at the intrinsic value, which is the future earnings of the business. It defines how investment funds will affect your future cash flow.
Size Up Your Team
Having the right set of people in your team can also help your company valuation. Assess your team talent, experience. What they can offer? Do you have a specific area of expertise individually? Are striving to attain a common goal? What makes you perfect for each other?
All of these determine how well your negotiations will be, with your investors. Make sure that, you present your team in a way that will make the investor be interested in your business ideas.
Rule Of Thumb
The rule of the thumb can be said to have been applied, when a seller and buyer, are able to negotiate to the point where both interests are secured.
Given these criteria, you should understand how valuations are done, for an early stage company and why every point matters. Carrying out proper research before engaging in negotiations with a potential investor is, however, important.
It gives you leverage, so you could determine how the negotiation goes.