Questions Business and Entrepreneurship

How to establish the valuation of your startup?

Airtract

Ricky Lal Rout

Purpose fuels passion

Running a business is tiresome and is a journey with lots of ups and downs. Establishing it, in the long run, requires a lot of hard work and a series of complex and lengthy procedures. 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. 

Moreover, 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.

Let us discuss the various ways in which you can chalk out the exact valuation of your business.

  • Calculating the value of the assets
    The first step towards calculating the value of your startup is by calculating the worth of your assets which includes all the equipment and inventory owned by the business. Deduct all the tax and liabilities.
    This calculation will give you the net worth of your startup, but you need to add the total worth for which you need to consider the annual income and expenditure.

  • Tallying the Revenue
    Tallying the overall revenue is very important while considering the worth of a startup. Calculate the annual revenue of your business and then through a business broker/stockbroker, determine a typical worth of similar business in your sphere of industry based on a particular amount of sales. 

  • Calculating the Price-to-Earnings Ratio
    For calculating the revenue on a more relevant way, you need to calculate the price-to-earnings ration of your business, and this will provide a rough estimate of your business revenue in the upcoming years. 

  • Tallying the annual cash flow using discounted cash flow analysis
    Discounted cash flow is an advanced formula that uses the annual cash flow in a business and then projects the same in the future. After projecting it into the future, the value of the future cash flow is discounted to today, by considering a “net present value” analysis.

  • Considering the Geo-Location
    Apart from all the financial worth, the value of a business is largely determined by its geographical location. 

The growth of your startup is ultimately determined by the amounts of profit your business acquires annually. For the startups, this becomes a challenging task due to the lack of proper experience. In such cases, you must calculate the time you’ll be required to make profits through your business. And only after that, you'll be able to calculate the worth of your startup precisely.

Read more: How should entrepreneurs approach the valuation question?

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