So, you want to know how much your company is worth? I'm glad to hear it. There's no trick to Company Valuation —it just takes some time and research. But before getting into that part of the process, let's first talk about why corporate valuation matters in the first place:
Corporate valuation isn't that complicated.
If you're new to Company Valuation, or have been doing it for a while but are still confused, let me help. Corporate valuations are not black boxes. In fact, they are quite simple and straightforward.
There are only 3 steps:
- Get the right data
- Estimate the likely range of values for your company (this is called an "estimate") and consider the probability distribution of possible outcomes in this range (i.e., what will happen if I guess high or low)
- Use some common sense about how these two factors affect each other.
Write down your company's mission.
Before you attempt to Selling My Business Calculator, it's critical that you have a clear understanding of its mission. This is the core reason why people buy products or services from brands: they want to know what they're getting in return for their money.
Your mission statement should be written down in plain language and easy-to-understand sentences. It should include details about what makes your business unique—the things that make you different from other companies in your industry—and how those factors will help customers achieve their goals or solve problems.
The more specific your mission statement is, the better it will be at communicating how much potential exists within each individual customer segment. For example: "Our goal is to provide our customers with world-class customer service." Or "We want everyone who shops here to feel like royalty."
Find out what the market values in a similar industry or sub-industry.
To find out what the market values in a similar industry or sub-industry, you need to perform an analysis of data from multiple sources.
- Find out what the market values of a similar company. This involves analyzing financial statements, looking at their history and comparing it with other companies in their industry. The resulting information will tell you whether they're undervalued or overvalued based on the value of their stock price relative to their peers. If they are undervalued, then investors may be able to sell their shares at a profit before they go up again (or even go down). If they're overvalued, though, there may not be much opportunity for short-term gains on this investment as investors will have already purchased shares with high expectations that have been disappointed so far!
Figure out why similar industry companies are valued at different levels.
To figure out the value of your company, you need to look at the factors that affect its stock price.
- Financials: What's their revenue? How much cash do they have? How much debt do they have?
- Growth: Is the industry growing, or are people just buying less? Are there new trends in consumption that could change consumers' preferences over time (for example, if Amazon wins over e-commerce)? If a company is growing rapidly but not making any money yet (like Uber), it may be risky as well because investors will likely discount future profits based on this high growth rate alone—which may make it hard for investors to recoup their costs when things go south later down the road (think about how many companies failed once they got big enough).
- Competitive position: Which competitors are bigger than yours, and why does this matter for your business model and potential customers' preferences today versus tomorrow or later still? This question can also help determine whether there's room for market entry by other players entering into an existing industry segment—and thus provide opportunity too!
Hopefully, this post has helped you understand how Company Valuation work and why they're important. As always, if you have any further questions or need help understanding a valuation topic, feel free to reach out!