The key to valuation

O THE KEY TO VALUATION Valuation is the process of determining IN 2015 the economic value of a company or business. ' There are 3 fundamental business valuation approaches which look at different aspects Pros of the business: Cons MARKET-BASED APPROACH INCOME-BASED APPROACH Bases price on the average of other comparable businesses 2 Bases price on the money a business generates for its owner 2 Easy to understand and apply 3 Useful for businesses that do not have inventory or many tangible assets, such as service providers 5 Data is readily available 3 Useful to determine probable sale price3 Carries risk as it relies on the May not capture the true value of an individual business ? company continuing to generate the same level of income in the future 4 BO) ASSET-BASED APPROACH Bases price on fair market value of business assets,? minus any liabilities 4 Useful for businesses with large tangible assets, including inventory and equipment, such as retailers or manufacturers 5 Does not easily account for intangible assets such as business goodwill or revenue forecasts 2 Difficult to determine what assets and liabilities to include, and the total value 4 WHY DO VALUATIONS MATTER? They can give you a sense of your business' worth when establishing partner ownership' or merging with another business. VALUATIONS CAN BE USED TO DETERMINE THE FAIR VALUE OF A BUSINESS. They can provide evidence of security when applying for a business loan 6 or They can help you calculate stamp duty and capital gains tax. investment capital. 7 They can tell you are owed if you are going through divorce proceedings or other change in marital status. They can help you settle on a reasonable price when selling your company. 1 VALUATIONS CAN HELP START-UPS SECURE FUNDING, BUT ARE THEY MORE IMPORTANT FOR NEW FIRMS? 2$ YES Entrepreneurs must put a value on their start-ups to generate funding and investors must put a value on their investments to create liquidity. 8 "Valuations do matter, but exact valuations do not." Leo Polovets, Partner at Susa Ventures VALUATION TRENDS IN 2014 10 VALUATIONS ARE GETTING MUCH LARGER The $1 billion valuations for start-ups once considered extraordinary are now becoming routine, " particularly in the technology field. 12 e airbnb UBER Snapchat 20 Valued at Valued at Valued at $18.2 BILLION in June 2014 13 $13 BILLION in October 2014 14 $10 BILLION in August 2014 15 Angel investors and bank loans are some of the resources start-ups can use to find funding. 12 Crowdfunding can help raise seed money online using community engagement and social media to generate capital. Websites like GoFundMe, Kickstarter, and Indiegogo are becoming increasingly popular and have the potential to change the way valuations and investments work, 16. 17 KPI-DRIVEN VALUATIONS ARE TAKING THE PLACE OF TRADITIONAL VALUATIONS IN SOME SECTORS. 12 In high-growth industries it's becoming more common to create a valuation based on key performance indicators like user stickiness, churn, and conversion rates. 12 School of Business D'Amore-McKim Northeastern University http://onlinemsf.neu.edu SOURCES 1. http://www.investopedia.com/terms/b/business-valuation.asp 2. http://smallbusiness.findlaw.com/closing-a-business/business-valuation-methods-for-when-you-re-ready-to-sell.html 3. http://www.valuadder.com/valuationguide/business-valuation-market-approach.html 4. http://www.valuadder.com/valuationguide/business-valuation-three-approaches.html 5. http://smallbusiness.chron.com/types-business-valuations-18360.html 6. http://accountantfirst.com.au/index.php/our-services/business-services/business-valuation.html 7. http://www.entrepreneurship.org/re- source-center/is-valuation-a-key-issue-in-funding-startups.aspx 8. http://www.entrepreneur.com/article/72384 9. http://www.forbes.com/sites/quora/2014/01/24/how-do-investors-value-pre-revenue-companies/ 10. http://techcrunch.com/2014/08/10/the-logic-of-crazy-valuations/ 11. http://www.usatoday.com/story/tech/columnist/2014/09/26/hootsuite-funding-50-million-twitter/16235533/ 12. http://www.iam-magazine.com/industryreports/Detail.aspx?g=5a4b7lcb-4747-4d2a-9395-777el254bOad 13. http://www.smh.com.au/business/world-business/uber-valued-at-us182b-after-latest-billiondollar-investment-round-20140607-39peh.html 14. http://www.cnbc.com/id/102117120# 15. http://online.wsj.com/articles/snapchat-fetches-10-billion-valuation-1409088794 16. http://www.crowdfunding.com/ 17. http://pbn.com/Crowdfunding-potential-unrealized-where-needed-most,101675 %24