Valuation

If only it were this easy

Early stage companies are nearly impossible to value.  There are so many factors that are simply unknown, that traditional valuation methods just don’t apply.  However, it is important for any entrepreneur to understand the ideas behind valuation and why companies are given the value they are.  Realize that once you know what gives a company its value, you can keep an eye on those factors as your business grows.

Comparable transaction value

This one is pretty straight forward.  Find as many private companies in your industry with a similar financial profiles that sold recently as you can.  Determine the mean selling price.  This is an estimate for your company’s value.

Public Comparable value

This is similar to the comparable transaction value method.  Simply look for publicly traded companies that have similar industry and financial profiles.  Average their “market cap”, and you’ll have an estimate for your company’s value.

Multiple valuation

This is almost the same as doing Public Comparable Value, except it should have less volatility due to irrational trading behavior.  The market price of stocks in a given industry tend to trade at a price that reflects a multiple of a specific metric.  For example, the technology sector tends to trade on a multiple of earnings.

Discounted Cash Flow Valuation

This is a complex topic that is beyond the scope of this site.  I will provide a summary here, but to truly understand this topic, please refer to authoritative sources on corporate finance.

Discounted Cash Flow (”DCF”) is a valuation method which takes into account all future cash flows that the company is expecting to earn, and it discounts them back to today (the fact that they’re future cash flows means they’ll be worth less  than today’s dollars due to inflation).  In particular, this method looks at the value of the Free Cash Flow (”FCF”) dollars available to the stockholder.

Caveat Venditor

Let the seller beware.  Your company is not comprised of just equity and cash flows.  There are MANY things beyond equity to consider when valuing a company - debt, intellectual capital, synergies, etc. The valuation techniques outlined above are just to give you an idea of how valuation will be initially looked at down the road - there are many moving parts.  If you need to get a more in-depth valuation done, please consult a professional.