7 Deadly Sins of Startups from a Valuation Perspective: Lack of Startup Managerial Experience

While many startup entrepreneurs have experience in a corporate setting, few have had experience actually running an entire operation on their own. In a corporate setting, there are already established relationships, financial resources, and managerial depth across other key functional areas of the business. Usually, in a corporate setting, the functional areas are also managed by different people. For example, human resources handles hiring and staffing issues, accounting handles the financial aspects and bill paying, the marketing department handles the marketing, and so on. Continue reading

7 Deadly Sins of Startups from a Valuation Perspective: Operating On Shoestring Budget/No Working Capital

Too often, entrepreneurs believe the business will quickly generate enough cashflow to sustain operations and, thus, enter into the new business with insufficient financial resources. They may try to operate on a shoestring budget until the business reaches cashflow break-even out of necessity due to a lack of access to additional financial resources. This may involve getting behind on paying bills, which could hurt the business’s credit and relationships with suppliers and vendors. Obviously, in the absence of access to additional funding sources or lines of credit, the lack of cash also can quickly result in the closure of a business. Unexpected or unanticipated expenses can quickly lead to financial problems and growth constraints for shoestring operations. For example, the need for an additional employee to accommodate demand, but not having the funds to hire, can constrict the business’s growth and profitability. Continue reading

7 Deadly Sins of Startups from a Valuation Perspective: No Break-even Analysis

A key part of the financial projections and business plan is for the entrepreneur to conduct a break-even analysis. The traditional break-even analysis reveals what level of sales a business must achieve to cover both the variable costs (cost of goods sold) and the fixed costs (overhead), resulting in $0 profitability. Beyond the break-even point, the business should be generating profits. Until the company reaches its break-even point, the business must have adequate financial resources to pay the bills and fund ongoing operations. Conducting a break-even analysis should enable the entrepreneur to test the reasonability of the business plan and financial projections. Continue reading

7 Deadly Sins of Startups from a Valuation Perspective: No Formal Business Plan

Along the lines of the first deadly sin, the lack of a formal business plan is also common among small businesses and startups. New entrepreneurs often mistakenly believe that opening a business and putting a sign outside is enough. It is usually the business plan that segregates viable businesses from an entrepreneur’s hobby that they hope to make into a business. In some cases the hobby may be a viable business. Successful entrepreneurs create a thoughtful and realistic business plan prior to opening the business to determine if the business is feasible both financially and operationally. Continue reading

7 Deadly Sins of Startups from a Valuation Perspective: No Financial Projections

The value of most businesses is the sum of the present value of the cash flows expected to be generated in the future. Amazingly, many entrepreneurs and new business owners are unable to provide a set of financial projections or budgets and the underlying assumptions. Many believe that growth of the business will just happen and that they will react to that growth by paying the bills, making purchases, etc. The most successful small business owners prepare, in advance, a forecasted income statement (or budget) and balance sheet that detail: expected revenue growth over the next three to five years, cost of goods sold, fixed costs or overhead, profitability, and how this translates into cash flow, the need for additional asset purchases, etc. Continue reading

How To Value A Business: Asset Approach

Asset Approach—The Asset Approach adjusts a company’s assets and liabilities to their fair market values and adds to the Balance Sheet the value of intangible assets and any contingent liabilities. While tangible assets can be appraised and reported on an adjusted Balance Sheet accordingly, the valuation of intangible assets such as reputation, employee talent, etc. is more complicated. Continue reading

How To Value A Business: Market Approach

Market Approach—The market approach derives an indication of value by comparing the company to other similar companies that have been sold in the past. The “guideline publicly traded company method” uses the prices of similar and relevant public companies as guidelines for determining the value of a closely held or family controlled business. The “direct market data method” relies on transaction data of similar closely held and family controlled businesses to determine an indication of value. Continue reading

How To Value A Business: Part 3

There are various approaches for business appraisers to utilize in determining the value of a business. Each approach has various methodologies that can be employed to determine the value of a business. The appraiser must then select the appropriate approaches and methods to apply to the company’s specific conditions to arrive at an indication of value. The approaches that the business valuation professional may consider include: Continue reading

How To Value A Business: Part 2

Under the fair market value standard, the hypothetical buyer is assumed to be a purely financial buyer seeking a return on the investment. The “financial buyer” lacks synergies or strategic benefits associated with the transaction. As a result, the fair market value estimate is typically lower than the “strategic value” estimate, which is based upon the price that encompasses synergies or strategic benefits that could be obtained through the acquisition. Therefore, the price that a strategic buyer typically is willing to pay for the company is equal to the fair market value estimate plus the value of any synergies associated with an acquisition of the company. Continue reading