Do you want to raise a funding round? Are you considering going public? Are you planning to merge with another company in the next few months? If so, you will need to calculate the value of your company.
It is difficult to make an objective valuation of our company. The project for which we have bet, in which we have put so much effort, and to which we have taken so much affection. However, it is necessary to take a realistic approach to estimate the value and price of our business. Fortunately, there are several methods to make an estimate based on numbers:
- Book value. This technique is the most commonly used, mainly due to its simplicity. We only need to take our company’s balance sheet and look at the net worth. That is the resources remaining after deducting the outstanding debts from the assets. This way, we can know the real wealth of the company, regardless of the resources that will have to be repaid sooner or later. However, this method has a drawback: it is only based on the company’s accounts, which is not always a good reflection of reality.
- Adjusted book value. This method is designed to compensate for the deficiency of the previous method. Assets and liabilities may have undergone significant changes in value and are, therefore, updated following market prices.
- Earnings value. Only listed companies are subject to this technique. The value is obtained by multiplying the net profit by the Price Earnings Ratio (PER). This ratio is calculated by dividing the share price by the profit it generates. With the earnings value, we can calculate the company’s value considering the profits it brings to the shareholders.
- Sales multiple. Used by SMEs that base their activity on the sale of products and services. It consists of multiplying annual sales by a number to be determined. This number is usually two but may vary slightly depending on the sector in which the company operates.
- Discounted cash flow method. The most appropriate valuation method. It is based on the calculation of future economic flows and discounting the value of the present risk. There is no specific formula for it since we can take different cash flows as a reference (cash, capital, etc.), and the perception of risk is subjective.
These are the five core methods for assessing the value of a company. We must not confuse value with price, that is, transaction value, which is determined by external factors such as supply and demand.
At Fellow Funders, we carry out an exhaustive valuation of startups and companies, either through our valuation service (Fair Value), as an essential requirement to carry out financing rounds (Crowd Investment), as a prior step to the incorporation into the alternative stock markets (Capital Markets) or for any other alternative operation (Alternative Assets). For this purpose, we use the sixth valuation method: the Fellow method.
We have our own scoring system based on ten factors: whether the project is investable, the team, honorability, market, differential advantage, competition, business model, traction, projections, and exit possibilities. We feel the successes and disappointments of the startups and companies we help as our own, but this does not prevent our team from being able to make a completely objective assessment of the projects. We know that no growth is possible without constructive and objective criticism.
Source: Software DELSOL
