If you have a start-up that needs some financing, there are several methods you can use to calculate your businesses’ value. Often, a combination of methods are used to come to a conclusion, and some methods are more applicable to certain industries than others. Here are some of the ways that a start-up business is valued.
Traditional business valuation methods are the asset, market, and income valuation methods. Used in conjunction with one another, they can give potential investors a good idea of the performance of a start-up.
The asset valuation method measures the assets of the business up against its liabilities. The difference between the assets and the liabilities is called business value. To calculate accurately within this valuation framework, each individual asset and liability must be quantified.
Market valuation considers what other competing businesses are worth to place a value on a similar business. This valuation method is especially valid for investors looking to purchase a business. When an accurate market value is reached, it is considered the fair market value for a business of its type. Sale data for similar businesses is the primary metric for determining the fair market value of a business.
The value metric that perhaps holds the greatest risk and variability is the income valuation method. This method is concerned with predicting how much money the business will make in the future based on present sales data. Here are some other valuation methods that are focused on performance.
Key Performance Indicator
A Key Performance Indicator (KPI) is a metric of a certain aspect of a company’s performance. KPIs that correlate with a company’s objectives are increasingly being used to measure the value of start-ups. Some key performance indicators that are especially applicable to a business that has an online component are churn, customer acquisition cost, and active users.
What used to be a word for making butter is now a term for the turbulence and turnover of a company’s customers. The rate of churn is high when many customers discontinue purchasing a company’s goods and services, so investors look for businesses that have low churn rates. An infographic from Northeastern’s masters in finance department shows that churn is one of the major performance indicators that is increasingly used as a valuation tool.
Customer Acquisition Cost
Customer acquisition cost (CAC) is the analysis of what it costs to get new customers for your business. Paid CAC is concerned with how much money it takes to get new customers through paid advertisement. The lower the paid CAC, the more effective the company advertising is and the price paid to entice each new customer is low.
The active users metric is especially applicable to a start-up that involves computer and mobile software applications. Once a customer downloads an app, the activity level of a customer’s engagement with the app can be measured. A company with many active users of its app is seen by investors as a good risk.
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