There are many reasons you should try to determine what your business is really worth. If you want to produce a financial statement or do financial planning, get a loan or an equity investment in your business, if you are thinking of retirement or want to sell your business or even a portion of it -- all are excellent reasons to try to determine what your business is really worth.

How To Approach Valuing Your Company

There are a number of different ways to approach this task. If you have a degree in accounting, you might look at the determinants of value: supply, demand, timing, market liquidity and valuation metrics. A more basic and, perhaps, just as accurate, way to approach the valuation question lies in the statement: "A business is worth precisely what a willing buyer will pay for it at any particular moment." But what is that?

To be fair, if it was truly easy to value a company, all venture capitalists would be batting 1000, which we know they're not. One reason is that it is especially difficult to value young companies. In a mature company, one can look at earnings and project them into the future, since a purchaser, or investor is really purchasing future earnings. For a mature company, the value assigned might be 20 times trailing earnings or 15 times forward earnings.

It is still part accounting discipline and part hope combined with a sublime act of faith to project forward earnings, even for mature companies, since the world is full of surprises and markets can turn on a dime. In fact, one venture capital group, which assiduously rates its own performance, has found that its leading category for bad decisions was in the area of valuations. With the benefit of hindsight, the group realized that they had failed to fully recognize the true value of many companies and had passed on those deals. 40% of those companies went on to outstanding success. As one, now somewhat wiser venture capitalist from the same firm puts it:" You can never pay too much for a great company."

Stage Your Company Is In - Reducing the Risk 

The per cent of your company you would have to give up in order to get venture funding tells a lot about how much risk is involved, which directly impacts how it is valued. The more which is unknown, unproven or unexecuted, the greater the risk for either a lender or an investor. Assuming your business has good positioning, that is, it is in a space with a lot of valuable companies around it, the following is a rough idea of the per cent of ownership you would have to give up to get financing at successive stages of development of your company.

• You have a guy or gal and an idea ( it better be a good one) ; you give up 65 % for equity financing
• You have a team and a prototype ; you give up 50 % for equity financing
• You are building your revenues; you give up 35% for equity financing
• You are building your market share ; you give up 25% for equity financing

At each of these successive stages, the risk has been reduced or mitigated. You are a little further down the road to being a successful company or even, one hopes, a great company.

As others view the risk involved and your chances of success, the most critical component is the team and its experience. Have they done this before? Have they been successful with other ventures? If you don't have a team....we're not counting people who sweep and dust or make copies.........stop now, catch your breath and start assembling one. Be sure to assemble a group whose skills are comparable to yours but in different areas. If you are a tech guy or gal, be sure to bring on a marketing whiz. If you are a people person, be sure to hire a numbers guru to back you up. Investors, and lenders alike, live in terror that you, the founder and jack of all trades, will be hit by a bus as you cross the street to deposit your check from them. It's easy to remove this fear with a team in place. Besides, you need a team. The speed and complexity of business today quickly outstrip one person's ability to solve every problem which arises.

How to Establish and Increase the Value of Your Company

One technique for both establishing value for your company and managing it better is to pick out a "best of breed" public company, with an established value, in your industry, which is your "financial" twin. If no "twin" is available, pick a company in your industry which, by making the necessary adjustments in size and scale and sales volume, you can use to establish the value of your own company. This will be your "control" company.

As you watch this company, and follow its business dealings, it can become a "case study" for you. You can analyze and replicate the moves which are successful, and avoid those which didn't work out as well. You can track the ups and downs in valuation and see which factors have the most impact on the over all value of the company. It will also give you a credible rationale when you are placing a value on your own company.

In order to know that you are increasing the value of your company in the future, you have to establish a valuation for your company today. This will take some effort and you may need some professional help to arrive at a realistic figure. Never-the-less, however challenging, knowing the true value of your business is an essential step for a well run company positioned to succeed and continuously increase in value.