Today’s question comes from Victor. I’m wondering if you have a formula or calculation to figure out the valuation of a company. I’m looking to bring in new investors but need to know how I can determine the value of my company.
We’ve talked about this topic before, so we are going to take a bit of a different direction today and talk about how businesses value themselves in general. There are two calculations that I’ve seen work well.
When you are pre-revenue it’s almost impossible to value your company. If you are trying to raise money early on you basically just want to avoid giving up equity and value. Anything over 25-30% of equity is too much to give up in your first round of fundraising. Most companies we work with raise about $250k to start with and give up about 10-15% of equity to get it.When you are pre-revenue it's almost impossible to value your company. If you are trying to raise money early on you want to avoid giving up equity. Click To Tweet
Post-revenue companies are much easier to determine the valuation of. The simplest way to do the calculation is to look at your annual run rate (monthly income x 12) and then multiply that by 3 or 5 (this is for SaaS products). This is a safe rate to sell your business for as long as you are running in the black. If you are making $100k a year then you could likely sell for $300-$500k. If someone is buying you at that rate they just want passive revenue.
Another way to do the calculation EBITDA (earnings before interest, taxes, depreciation and amortization). You can generally sell your business for 3-5 times more than your EBITDA.
Simplistically, let’s say you are making $100M a year and you are spending $50M on product. 20% of that is on operating expenses so then you have about $30M as operating profit. Without doing all of the calculations, you could probably sell for about $60-$120M. As your business grows the expenses will go up so when you are trying to value your company you have to account for the growing expenses along with the growing revenue.
When you go into a sale, make sure you have someone around you who knows about all of this. The last thing you want to do is sell your company for less or more than what it is worth. If you are thinking about selling your business or valuing your business then go find another similar business who has already gone through that phase and see what they’ve done. A lot of that data is public (places such as AngelList) and gives you a great place to start for your own valuation.
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