Valuing a startup company is very difficult. There are many factors that combine to determine how much any startup company is worth. More established companies with at least five years of operating history may be valued using the standardized approach that analyzes historical earnings as the basis of the valuation. A company that has only one year of earnings and is looking for a partial investment, or even is being acquired immediately after its first year of operation may have a more complicated valuation structure. This article is designed to provide the reader insight related to the method of increasing the company’s valuation at this stage by tangible and measurable points the business owner may take.
The acquisition of patents and intellectual property can directly increase a company’s valuation because it has additional value that extends beyond the historical earnings. The life of the patent may be used to justify either the continuation of higher than average market growth or increased growth if the patent was recently acquired. In some instances, companies are acquired and/or invested in directly because of the patents that they own.
A biotechnology company, for instance, may recently acquire FDA approval and patent their medication in order to commercialize it. While such a company may not have any earnings at all, the value of its patent can be highly valuable, which extends to other circumstances in other industries as well.
A purchasing agreement is effectively a contract formed with your company to purchase its product and/or services for an extended period of time. A company that produces wool fabric may enter into a one year purchasing agreement with a clothing manufacturer at a fixed price. Such agreements are very common in the business to business market, particularly where the product sold is a commodity and buyers want a stable price.
Such agreements increase the stability of a company and its ability to effectively forecast earnings. In effect, the company is discounted a smaller amount because less compensation for the initial risk is required. A company that does not have these purchasing agreements in place cannot bind its buyers and its sales are less reliable than one that does. Therefore, it is helpful to secure such agreements for companies seeking to increase their valuation.
Strategic Partnerships & Affiliates
Strategic partnerships can often bring a business from no revenue to tens of millions within a few short months. In essence, it is taking advantage of the established business being generated at a larger company and applying it to your case. For instance, a company that sells business registration may form a strategic partnership with a web development agency to promote its services to its existing client base.
These types of partnerships have a strong ability to increase the value of a company because it also demonstrates long-term stability and minimizes the assumptions about revenue generation. A company that has over five years of operating history is not a far cry to assume it will continue relative to its historical year.
However, a company that grew 1,000% over the past two years may appear unstable. Therefore – it is advantageous to demonstrate that the company has a stable source of revenue rather than it being generated on a source less predicable.
Lack of Dependency on Founders
A company that depends on its management team and/or founders to continue its profitability is not always a good acquisition. For instance, a law firm whose reputation is solely based on the track record of the partner, who – would leave the company after its acquisition, would not continue to grow at the same rate. Therefore, it is helpful to minimize the dependence on everyone within the business and focus around building a strong trademark protected brand identity.
When a business is not heavily dependent upon the founders, it is more likely to remain stable and operate as it did in the past when it is acquired. At some point, the founders and/or existing management will leave the company and the only way that the company may sustain its growth and profitability is to exist without them. This can be achieved through succession planning, as well as slowly moving the business model to one that does not require the dependency of the management team. For instance, if the marketing proposals of the company focus on the partners, try investing into the reputation of the brand and promote its qualifications collectively as its employees and previous experience.
These methods are just a few ways to increase your company’s valuation and do so in a way that will help your exit be more attractive and generate a higher payout. Hence, it is worth considering how these factors influence your exit and the methods you may take in order to increase it.