Valuing a Start-Up
Approaches to Valuing a Start-Up Business
At FHM Forensic Accounting we are often asked if we can value a start-up business. The typical start-up is a new business venture created by an entrepreneur and often focused on developing a new technology or product/service and then exploiting the product or technology in the market. In recent years these are often new software applications or health products.
All company valuation is subjective but valuing start-ups is one of the most challenging areas of business valuation.
Start-up valuations may be required in divorce, shareholder disputes or in raising funds or investment. As in all valuation, the reason for the valuation is relevant in deciding on the approach to the valuation.
Start-ups tend to have negative cash flows and possibly minimal or no sales, limited historical cashflows and the proof-of-concept may not yet have been proven. Traditional valuation methods such as capitalized earnings and net asset valuations may not be relevant depending on the stage of development.
There are several ways we can value start-ups and these are explained below. We may adopt more than one valuation method to get a broad range of valuation for the company.
The cost approach
The cost approach (also called “cost to duplicate”) looks at the costs incurred to get the start-up to its current point. The assumption is that an investor will at least cover the costs already incurred. This method gives no credit for the future value that may be generated and it gives no value to the intellectual property beyond the actual costs.
The venture capital method
Using this method, we estimate what the “exit-value” might be in a few years when the company is sold. This figure is then discounted back to arrive at the present value. The risk that this venture will not achieve the exit value will be factored into the calculation through the discount rate.
The scorecard method
This method assesses the business against various criteria that an investor considers important including the team, the product, the target market, the strategic relationship and applies a value to each one. This value is discounted for the risk attributed to the start-up. This method tends to be investor specific.
Discounted cashflow
If the start-up is at a point where future cashflows can be reasonably estimated, then we can adopt the discounted cashflow method and discount future cashflows back to give us the current value.
Market multiple
If sufficient information on estimated future income is available and we have data on recent acquisitions that are similar in nature, then we may be able to use a calculated market multiple.
Conclusion
In summary, valuing a start-up is highly subjective and in all methods requires an assessment of the risk and rewards as well as the likelihood of success of the enterprise. An investor will have a specific risk profile which, depending on the purpose of the valuation, will need to be considered.
Getting in Touch
Fee estimates and CVs are readily available. Quotes can typically be provided within two working days.
Email: fiona@fhmforensic.co.uk
Telephone +44 (0)7770 642491
