Income-based valuations are a crucial tool for investors and business owners in determining the value of an asset based on its expected financial performance. But they are not the only way to go.
Many factors weigh on the valuation of a company, and for sure there are no two businesses alike. Furthermore, even similar companies find themselves at different stages of their lives when they start talking with investors and buyers: some are consolidating while others are expanding; some are profitable right away and others are not for a long time; some are not even generating revenues when they are acquired.
But a very effective way to monitor the market (albeit quite simplistic) is to benchmark the M&A activity in a specific sector and in a given period. Markets go through different phases after all and there might be more or less appetite for companies like yours, and therefore investors might be inclined to accept higher or lower valuations.
The Checklist method compares early-stage startups within the same geographical market, taking as highest value the highest valuations in the market, with the exclusion of outliers and notable “crazy” exceptions.
After gathering this local data you are left with a maximum pre-money valuation and you will discount this valuation by the quality of the criteria assessed. In other words, it’s impossible to end up with a valuation higher than this maximum benchmark.
When looking at early-stage valuations, our favourite approach is to rely on benchmarks from the market and then compare them with the start-up we are valuing. We normally arrive at a final value by using two different methods: the ‘scorecard’ and the ‘checklist’ methods…
The key to successfully securing investments for a business is a strong information memorandum, also referred to as an info memo