How To Price A Company

You’re an entrepreneur trying to figure out how to price your company.  Maybe an investor wants to know, maybe you just want to know for your own sanity.  Even beginner entrepreneurs should start to get into the mindset of what ultimately creates value in their company though.  Whatever the reason, if you need to know how to price your company, here’s how to do it:

Start by pricing your company based on it’s assets.  Aka: the asset approach.  Possibly the most widely used strategy to price a company, you’re calculating the value of all the company’s assets.  And yes, even a startup company can be priced based on assets.

 

1. Price Company Equipment

 

Start by calculating all your tangible assets.  This includes things like your office furniture, equipment, computers, or any remaining inventory that has been left unsold.  Common sense, but don’t include things you don’t own (like the building you’re renting).  If you still owe on them, subtract the balance from the value.

 

2. Price Company Intellectual Property

 

Next, calculate other assets like your IP (intellectual property).  Intellectual property will include any creative works that are either patentable (or can be patented), copyrights, trademarks, trade secrets, etc.  Even just incorporating your company name is considered intellectual property.

 

3. Price Company Talent

 
 
A company is nothing without it’s people. Committed & talented employees are extremely valuable to a company.  This takes into account all full-time employees.  When you value your employees, consider their annual salary and the cost to the company if it had to replace & train them.  How rare is that employee?  How scarce is that talent?  It’s not uncommon to see just one rare talent employee raise a company’s price upwards by $1,000,000.
 

4. Price Company Customers

 
 
Not just what they’re paying you right now.  Place a value price on your customer relationships and pending customer contracts.  Customer relationships are an asset, and again, one of the most valuable pieces to a company’s ultimate price.  Reason?  Company’s spend on average 10x more to acquire new customers then they do retaining them.
 
 

5. Price for Growth

 

 

If the market is showing good growth representing opportunity, a buyer will usually pay a higher price based on the anticipation theory of profit potential.  Calculate the size and growth rates of your addressable market (not total market).  If you are planning on going big, or looking to attract big players, rule of thumb is targeting a market of at least $500 million.  If you aren’t operating too lean with heavy equipment requirements (for example: energy) rule of thumb is at least a $1 billion dollar market.  Based of course, on sales potential.

 

Tools to help price a company:

EZNumbers is a professional pro-forma package that calculates and projects revenue & assets.

A few simple valuations here: http://plantostart.com/pre-money-valuation-calculator/

 

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