When it comes to business, it is highly important for investors to see the company’s financial standing as this directly reflects the market’s interest and acceptance of a company’s products and services. One of the most fundamental facts about businesses is that the operating performance of the firm shapes its financial structure. However, it is also true that the financial situation of the firm can also determine its operating performance.
Your business’s financial standing measures your company’s overall health. The process of determining the latter is called “business valuation.” It is often conducted to provide an accurate snapshot of your company’s financial performance to both current and potential investors. Your business valuation is of utmost importance to them as they are getting the company share in lieu of the money that they spent, or are going to spend, if ever they decide to invest.
Methods of Valuation:
Discounted Cash Flow:
Discounted cash flow is used to find out the value of the company as of today based on the projections of all the cash that could be made available to investors in the future. It considers the principle of “time value of money” (i.e. cash in the future is worth less than available cash today).
Comparable Company Multiple:
Comparable companies’ analysis involves the comparison of operating metrics and valuation multiples of comparable public companies with the same target market.
Precedent Transaction Multiple:
It is a valuation method in which the price and valuation of similar companies in recent transaction is considered as an indicator of a company’s value. Precedent transaction analysis creates an estimate of what a share of stock might be worth in case of an acquisition.
Challenges with valuation of a startup
Small or no revenues, operating losses:
In case of startups in initial stage, revenues are small or non-existent for idea companies and the expenses often are associated with getting the business established, rather than generating revenues.
Many don’t survive:
Many startups fail for a number of reasons such as lack of experience and funds, no clarity on business idea, legal barriers amongst others.
Multiple claims on equity:
To protect their interests, preceding equity investors demand and get protection against this eventuality in the form of first claims on cash flows from operations and in liquidation and with control or veto rights, allowing them to have a say in the firm’s actions.
Investments are illiquid:
Equity investments in young firms tend to be privately held and in non-standardized units. They are also much more illiquid than investments in publicly traded companies.
When it comes to business valuation, it is indeed true that startups face a number of challenges. The business is only starting, and the company’s financial standing might not be that established yet. However, with creativity, new ideas, and teamwork, the business will surely improve. There are many internal and external factors affecting business valuation. Also, notwithstanding of the valuation technique used, or the challenges faced, valuation mainly depends upon the demand and the value propositions that the company brings in for the society.