Yesterday, we spoke about what equity is and how it and venture capital work together. Today we will talk about valuation for small businesses when it comes to equity. How do you get a value, and what does it mean for equity? We will explain this and more in the page below.
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What Does Valuation Mean?
If you are looking for funding for your small business through equity, you need to know the valuation of your company. Valuation is a professionally determined number predicting the current or projected worth of a company.
Finding the valuation for your company is key when it comes to investing and equity. When you are selling a percentage of your company, you’ll need to know how much your company is worth. It matters not just for you, but for the potential investors. Getting a valuation can be for other purposes as well. Selling your business, tax purposes, merging or acquiring other companies and more all can require valuation.
Let’s say you’re planning on selling 25% of your business. A valuation too low won’t give you the money you need, and a valuation too high hurts the investor. This is where valuation by professionals comes into play. So how can my business get a value?
Equity Valuation Methods
There are a few different methods for finding your business’s valuation. Here are some of the forms of valuation for equity that we most recommend.
This form of valuation is possibly most key to equity financing. A return-on-investment based valuation explains what the potential ROI of an investor could receive for buying into your business. We will talk more about ROI-based valuation at a later date, but the most important thing to know is that it is going to provide the information that your potential investors will be asking about.
Market Value Valuation
This is a more subjective form of identifying a business’s worth. It involves mostly just comparing your business to those of others that have been sold. In other words, it looks at the marketplace for businesses and gives you an approximate value as a result of that.
Assuming the business is a going concern, this involves enumerating the assets of a business in order to understand how much it is worth. This is about what your balance sheet shows more than anything else.
This is also similar to finding the book value valuation via the balance sheet.
Equity valuation is key to selling parts of your business. Knowing how to utilize venture capital is important but knowing the value of your business matters beyond just the basics of operating your small business.
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