Almost all startup business owners want to make an exit one day and sell the company. This is particularly true when its value is hundreds of millions of dollars.
Suppose you’re one of these business owners. In that case, you need to ask yourself one question – do you know anything about your company’s value?
If you aren’t familiar with company valuation, you’re in luck. Today, we will talk about business valuation and the factors affecting its result.
Determining the Value of Your Company
To make things simple, valuation is defined as the multiple of the number of shares outstanding by the price per share.
Although, due to the combination of quantitative and qualitative factors, company valuation is a science.
Because of its definition, a couple of factors can influence the final result of business valuation. Here are some of these factors.
Note that there is an uncertain positive correlation between a company’s valuation and the stock market’s performance. To make things simple, valuations will be higher if the stock market is doing good and vice versa.
On the other hand, if the stock market is in crisis, people and companies don’t usually invest. This is particularly true for risky companies like startups. Thus, their value is unimportant.
There is a direct correlation between the valuation of a company and how well its numbers and financials stack up.
There is a positive correlation between the company’s financial success over other businesses in the market and the value of the company.
For instance, if the profit margin of a business is 20%, but the average in that industry is 10%, the company is a lot better than the competitors. This consequently provides a better value for the company.
The Entry Point of the Investor
A couple of investors have an investment range for valuation. For instance, a particular investor might only invest in businesses valued at less than $5 million. The reason for this is that these investors think that they can earn higher returns with this method.
Trendiness and Size of the Market
Other factors that can affect a company’s value are the growing market demand and the company’s size.
Of course, your company will have a higher value if it has a bigger market.
Leadership Team Experience
Since there is a perceived negative correlation between risk and more experienced entrepreneurs, the valuations of businesses with more experienced leadership teams will be higher.
A company will have a higher value if it has an experienced team of successful entrepreneurs.
Furthermore, there is a positive correlation between the value of a company and the number of investors who want to fund the company—the value increases as the number of investors increases.
Stage of the Company
Several factors affect the early-stage valuation of the company. This includes the amount being raised, the perception of overall opportunity, the potential growth, the team, and the business owner’s experience.
On the other hand, late-stage valuation dramatically depends on the company’s projections and actual financial performance.