How to Evaluate the Start Up of a Business Investment

by Catherine Lovering
Evaluating a corporate strategy can require a team effort.

Evaluating a corporate strategy can require a team effort.

If you've invested in a new company, you might want to know how much you can sell it for. Evaluating a start-up is a difficult task; with no sales history to analyze the exercise is largely speculative. Pulling a number from thin air, however, is neither recommended nor necessary. There are ways to place a valuation on a start-up that include betting on the company's future, itemizing what it owns and the market climate for similar acquisitions.

1. Evaluate the business' earning potential. As a start-up, the enterprise is likely not yet profitable; assessing the business' future profits is one way to decide on what its current valuation should be. A start-up which should be profitable quickly is likely worth more now than one which will take several years to develop. Earnings potential can be determined using the size of the market and the existence of any competitors. The company business model and stage of development are other tools you can use to assess the business' ability to turn a profit.

2. Calculate the value of the company's assets. The business is worth what it owns, in terms of equipment and inventory. Assets also include the value of the start-up's intellectual property: patents, trademarks and the company name are all potentially substantial assets of the enterprise. The organization's key people are also assets; if there are individuals with important technical expertise or unique skills that give the company a competitive advantage, include this in your calculation.

3. Research comparable deals. To assess the market value of a start-up, look at the selling cost of similar companies in the same industry and region. Recent deals will give you an indication of your competition and also what the market is willing to invest in such a company. Note what was unique about each of those deals; if there was a key element to a particular company that made it valuable, such as a patent, your start up might be worth less if it does not contain something similar.

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