Christopher Justice · Entrepreneurship
Valuation of Your Business
A sustainable business also focuses on valuation which is the amount your company will potentially sell for over time. Your valuation is a formula that takes into account your assets, your…
# Valuation of Your Business
A sustainable business also focuses on valuation which is the amount your company will potentially sell for over time. Your valuation is a formula that takes into account your assets, your profitability and your cash flow and that equation results in what your company might be worth in a one, three or five year period to another company.
There are several different reasons why you might want to know the value of your business, including selling it, merging with another business, tax or loan purposes, for estate planning, allocating the purchase price among business assets, establishing an estimate of the value of partners' ownership interest for buy-sell agreements and more. Whatever the reason, it can be a challenging process to come up with a valid number.
Valuations might also be used to calculate stock options (aka, 'funny money'). These are not publicly traded stocks, but rather, a metric for developing and managing ownership in the business. Some people want possession of more or less shares, which doesn't mean much at the early stages of your business; stock options in this case are simply a metric for dividing business based on the principals involved.
The only division of stock options should be to people who have invested money in the company (you do not want to give away the company at all, especially to outsiders). There are a lot of ways to do shares and ownership and contribute back, like sharing the success of your business into your employee base. However, early on, giving away shares and ownership in your business isn't one that's recommended.
A valuation requires a complete analysis of historical operation of the business itself as well as a study of the projected future for the industry, the economy and the competitive advantage of the company.
To do a thorough valuation is more than adding up numbers from different reports because it takes into consideration intangible factors that are not easily quantifiable. There are more than a dozen different methods of valuation, and the mastery of the professional actually doing the valuation has a tremendous influence on the outcome.
Companies and venture capital firms buy or invest in people, patients, predictable revenue and potential, not products nor your pride.