Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation.
Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value. The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its going concern, or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt.
Challenges in valuing a startup (social science research network, 2009)
- No history – Young companies have very limited histories. Many of them have only one or two years of data available on operations and financing and some have financials for only a portion of a year.
- Small or no revenues, operating losses – Revenues are small or non-existent for idea companies and the expenses often are associated with getting the business established, rather than generating revenues. In combination, they result in significant operating losses.
- Dependence on private equity – Most startups are dependent upon equity from private sources, rather than public markets. At the earlier stages, the equity is provided almost entirely by the founder. As the promise of future success increases, and with it the need for more capital, venture capitalists become a source of equity capital, in return for a share of the ownership in the firm.
@iBizAfrica and Strathmore University School of Finance and Applied Economics will provide free company valuation for startups over the next three months.
Have you run a startup for at least one year? Are you generating any revenue? Are you curious to know how much your company is worth?
Sign up now at https://goo.gl/ANZBHV to receive free consultancy on company valuation for your startup.
Deadline 15th July 2016.