1) Asset valuation
The most concrete way to value a business is through asset valuation, which is placing a price on all the assets on your company’s balance sheet.
These assets include machinery, furniture, computers, inventory, and intellectual property such as patents, trademarks and even incorporation papers (because the company’s name is protected).
The most valuable parts of most businesses are their employees and customer base. It is not uncommon to see valuations rise by US$1 million for every paid full-time programmer, engineer or designer in the tech startup world in the United States.
Customer relationships are also worth a lot of money. Every customer contract is worth something, even those still in negotiation. If you run a subscription-based business, the customers that bring in recurring revenue without incurring sales cost are particularly valuable.
Though most startups are valued based on their potential and the technology or system they have invested in, this asset valuation approach will give you a real, tangible amount for the business.
2) Market valuation
This method of valuation is based more on the market’s theoretical demand. As the owner, estimate the size and growth of your market – the bigger the market and higher the growth projection, the more your business is worth.
As market valuation is based on your business’ competitors, before you can determine your estimated worth, you need to assess the competition. The stiffer the competition, the lower your company’s value.
However, if you have already established and cemented customer loyalty (based on factors such as location, contracts with key customers, etc.), then your business can potentially be worth more.
However, unlike assets valuation, market valuation is based on intangibles. Hence, you will need to depend on goodwill – which is not necessarily a negative thing, as it can bump up a valuation by a few million dollars.
Another way to gauge your company’s worth based on the market is to compare it with other similar companies that have managed to raise money – kind of like finding out how much similar homes in your area were sold for recently.
3) Income valuation
This is an advanced method to determine the worth of a business, involving the projection of a company’s future cash flows and discounting them to arrive at their value in present dollars.
The younger the company, and the greater the uncertainty of its future earning power, the larger the discount rate should be (from 30% to 60%). Therefore, this method is not suitable for really new pre-revenue startups.