Attract more investors by determining your company’s worth.
Determining how much your company is worth can be a challenging task. Oftentimes, business owners put their company’s value at a higher range than what investors believe they are worth. The discrepancy lies on the fact that business owners take into account the sweat equity they have invested into the business. On the other hand, investors only consider the more tangible factors such as earnings and market shares before they put any money in your business.
While there is no exact science in valuing a startup, you need to determine how much your company is worth if you want to raise additional capital from interested investors. If there is no single technique that can be used for this purpose, how can you come up with a more accurate valuation of your company? Here are some tips that you may want to consider.
Consider your investors’ opinion. Talk to a number of investors to find out how much they think your startup is worth. Given the fact that you may not be generating any positive cash flow at the moment and have not gained any brand recognition yet, you may need to accept the market valuation even if you think your company is worth more than what they say.
Also remember that even if you managed to persuade family, friends and relatives to invest in your business at a particular dollar amount per share, it does not follow that future investors would be willing to invest in your company at that amount.
Use comparables in determining your company’s value. Do your research to know the market rate of similar firms in your industry. Ask for your lawyer’s and accountant’s opinion to determine your company’s value. However, keep in mind that lawyers tend to overvalue startups while accountants have a tendency to put a lower value on fledgling companies.
Apply the discounted cash flow method. Use the discounted cash flow method to come up with a 5-year financial forecast and use it as a basis for valuation. While this method may have some flaws, it can show potential investors that you have thoroughly thought through your numbers, and would be able to defend your valuation.
Focus on future performance. Since there is a great chance that your business is not making enough profits yet, you may need to focus on future performance. Determine how many years it would take for your business to be profitable and how much comparable companies are worth once they become profitable.