Questions Business and Entrepreneurship

How should entrepreneurs approach the valuation question?

Airtract

Ricky Lal Rout

Purpose fuels passion

Establishing a business, in the long run, requires a lot of hard work and a series of complex and lengthy procedures, and it is a journey with lots of ups and downs. The value (worth) of a start-up is very essential in establishing the future for the company. The higher the value of a start-up the more investors it will attract and on the investor's side, the higher the value of their investment, the better is the liquidity generated. For the same, you need to know the exact valuation of your start-up so that you can calculate the number of shares you need to give away to your investors, once you’ve successfully raised the money.

Now the question is how entrepreneurs should approach the valuation question?

Well, there are a lot of mathematical formulas using which the entrepreneurs can calculate their value. Let us discuss few of them.

  • Berkus Method

Berkus Method is one of the simplest ways of calculating the worth of your business (which is referred to as “Box”). Here the starting question is whether you are confident that your business will be worth $20 millions in revenue by the 5th year end. Berkus Method displays the five prime factors which will help you to make your box worth $20 million. 

The above infographics show the five prime factors and give you an idea of where to improve. One drawback is that the pre-money valuation should not exceed  $2 million.

  • Risk Factor Summation Method

Risk factor method is the upgraded version of the Berkus Method. To begin with, you need to calculate the initial base value of your business (box) and then using this method you’ll be able to analyze the 12 standard risk factors that accompany your box.

  • Book Value Method

Book Value Method considers the net worth of business by analyzing the tangible assets associated with the company.

  • Scorecard Valuation Method

Similar to the Risk Factor Summation Method, you need to start by calculating a base value for your business and then adjust some set of pre-analyzed criteria by tallying. The weight of the factors is calculated based on their overall importance on the business.

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