What is your business idea worth?
Company valuation is not an exact science and this is even truer for a business idea
A company valuation is the process of determining the economic value of a business and this this can only be done with quantitative or qualitative information. In this sense,
A BUSINESS IDEA BECOMES SOMETHING OF VALUE ONLY WHEN IT IS EXECUTED AND YOU START GATHERING VALUABLE QUALITATIVE AND/OR QUANTITATIVE INFORMATION ABOUT THE BUSINESS
Let’s have a look at the “When”, the “Why” and the “How” of a business idea valuation
THE WHEN
During the valuation process, all areas of a business are analyzed to determine its worth.
You can start a business idea valuation exercise upon completion of a qualitative and business model analysis, then benchmark the results with other companies having the same profile (See below on the “how” section).
Adding then financial projections will make your valuation significantly more reliable and allow you to use more financial driven valuation methodologies such as the famous discounted cash flow method. The cost method might also be used for a business idea
THE WHY
An early stage company valuation offers several benefits
- A structured approach to evaluating the feasibility of the business
- Looking at financial projections, market demand, and competition can help to validate the business model and strategic decision process
- Attract external funding to grow the business through fundraising and financing (pre-seed, seed, Serie A & B money)
- Mitigate risks
THE HOW
You can complete a qualitative assessment of a company using the checklist or scorecard method. These 2 methods include the analysis of the team’s strength and funding capabilities, the market and competitive environment, the strategic relationships with partners, the IP rights, the product/services USP and compare it with the market average or maximum valuation for the same industry
Example of questions supporting the completion of this exercise:
- Is the business scalable?
- Has the demand for the product been tested?
- What is the current market size of the business?
- How much did the founders invest? Are the committed full time to the business
Whereas the checklist method compares early-stage startups within the same geographical market, taking as highest value the highest valuations in the market, the Scorecard Method uses the average startup valuation in a given area as a benchmark.
For more quantitative methods, a significant discount needs to be applied to early stage companies. Based on Equidam’s research on Venture Capital expected return, for an idea stage company the annual discount applied accounts for a high year- on-year Return on Investment (or ROI) of 135%.. For the development stage 114%.
While the company is moving to a start-up or expansion phase and the financial projections are more accurate, you might increasingly use the multiple or discounted cash flow method to value the business. In any case, for any company in any stage, the best practice is always to use several valuation methods and put a weighting % on each of them depending on the stage, to come up with a final valuation. It is called the football field analysis (with a range of values).
Weather you select an income (DCF..), market (Multiple..), cost or qualitative approach for your valuation, all these methodologies have something in common, you need a good story to explain the results of the valuation. In general, business valuation is more about the credibility of the story than the accuracy of the figures, and this is especially the case for early stages, and growing companies.
If you need any support for your company valuation, please contact me. With over 30 years of experiences in Corporate Finance including 10 years as a CFO in different industries, I organize Finance and Valuation workshops/services on site or remote. (Workshops in English or French)
Valuation workshop and services include 2-5 days qualitative and quantitative analysis, business/management discussions and a clear and comprehensive valuation and benchmarking report.
Stephan Ullmann, MBA, M&A and Valuation expert EN, FR, D
stephan.ullmann@horizon-solution.ch
+41 79 894 23 06