How Much is Your Startup Worth?

by Joann Yates

With a few possible exceptions, everything has a value, and that includes startups. Whether it's part of the chase for venture capital, or just in search of a bank loan, sooner or later, you'll have to decide how much your business is worth. Picking the right numbers is crucial, and a lot harder than it might seem.

If attaching a price was as easy as it appears to be, appraisers wouldn't be in high demand -- or collecting high salaries. If deciding how much a 1960s lunch box would sell for at auction is guesswork, then valuing a business -- with a wide mixture of physical assets and ephemeral sources of capital -- is pure prophesy. How then do you go about finding a reasonable number?

Look around. The idea behind your startup may be unique, but there will always be a business or two that is close to yours. Look at how similar companies are being valued, and build your number from there. Take into consideration how your company differs from the others, and how that might affect the end result.

You are what you make. Reviewing the company's takings can put you on the right track to a reasonable price tag. This method, called the Income Method or Income Before Depreciation, Interest, and Tax (IBDIT), uses averages from recent financial information to divine the business' earning potential and with it an accurate valuation. The method's reliability is closely tied to your startup's tenure -- the longer you've been in business, the more accurate the projections will be.

Count what you have on hand. In the simplest terms, a business is worth what it has: Add up the assets and you have your number. Reality isn't as easy as that, however -- startups have assets that are hard to quantify, and may be overlooked entirely. Valuing your company based on assets requires an accurate appraisal of physical property, including real estate, vehicles, equipment, items in inventory, and furniture, among others. The business' liquid assets must be considered, and any intellectual property must be assessed.

Startups have other assets, however, and your calculations should reflect this by considering the value of intangible assets. Customer relationships have a value, measured by future gains from existing agreements or averages from their purchase history -- indeed, a business' customer capital may exceed its physical holdings. Personnel also factor in the numbers, adding to the company's value through their potential, as well as existing reputation. (A company that attracts well-known talent presumably has something other companies don't.)

Measure the market. It goes without saying that a company's value is closely tied to the market it is in. If there is high-demand for what your startup is selling, your valuation will increase -- likewise, the more the market is expected to grow, the more you can expect your numbers to go with it. The other players on the field factor in as well: Your startup is worth more as the only one in the game, or if the others pale by comparison, than it is when the market is flooded with competitors, or your company is trailing behind. Experts term this "goodwill", and some buyers place a premium on it, which is good for you, especially when the numbers offered by the other methods are less than stellar.

No matter which method you select, deciding the price to put on your startup will be a challenging task. Choosing wisely, however, provides you with the chance to paint your company in the best light, highlighting its potential gains and minimizing the lighter sides.