Valuating your company is not an exact science. There are no objective standards to measure with. Think about valuation as creating reference points to make your case for the asking price of your business. The more data you have to refer to, the stronger your case will be.
There are four general valuation methods that we recommend to use as data points when making your case. However, these are more general methods. Both buyer and seller are going to want to base their decision off more than that.
Nine items to factor into your asking price
It can be difficult to put an exact figure on the following items, but there is no question that they hold value, and you should be compensated for them (keep in mind this is not necessarily an exhaustive list):
- Physical assets
- Intellectual property
- Contracts with clients
- Partner/supplier agreements
- Talent
- Room for growth
- Goodwill & brand recognition
- Data
- Licenses and permits
1. Physical assets
This includes any property that is legally owned (not leased) by the company, whether that’s employee uniforms, computer hardware, manufacturing equipment, or the building you operate out of.
2. Intellectual Property
When it comes to intellectual property, you’ll want to factor in not just the costs of developing and protecting said IP, but the financial potential that that it has. Can it be licensed for extra revenue? Do you have exclusive control over a product or process? If so, how much in sales can you attribute to such an advantage?
3. Customer contracts
The contracts a company holds with valuable customers might be the biggest selling point for said company. You’ll want to factor in the revenue that comes from these customers, as well as the cost of acquiring said customers and maintaining the relationship.
4. Partner and supplier agreements
Partner and supplier agreements hold value in a similar way to contracts with customers. You might have negotiated advantageous terms, and there’s also a cost to building and maintaining those relationships.
5. Talent
alent is the heart of any well-run company. Naturally, a business is a lot less valuable without the people who make it successful. Beyond that, talent can have an almost immeasurable value. In fact, companies like Facebook sometimes acquire other companies simply to bring their talent into the fold.
To argue the market value of your talent, think about the cost of recruiting, training, and retaining your team members, as well as the profits you can attribute to each.
6. Potential for growth
Potential buyers don’t just want a reliable revenue stream; they want a business with potential for growth. You’re going to have a hard sell if the market is already saturated and the cost of competing for more sales is high. On the other hand, if your company is in a position to increase revenue for years to come, you’ll be able to factor that in on top of the value of the revenue it provides now.
7. Brand recognition & goodwill
Brand recognition and goodwill of the public toward your brand is difficult to measure, but we can all agree that there is a significant cost to building it. One way to quantify this cost is to measure the cost of your marketing efforts over the years, as well as the cost of building and maintaining customer relationships. Think about the advantage that this goodwill gives you. Are you likely to win sales over the competition due to goodwill alone? Is there a hard number you can attribute to that goodwill?
8. Data
Data has always been valuable, but in this day and age, it’s more so than ever. Even if you’re not a tech company, you should be capturing some sort of data that has value to your company. This could include:
- customer lists
- market research
- website analytics
- marketing analytics
- industry trends
See the resources below for help with measuring the value of your data.
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Some of the factors that are a company’s strongest selling points will seem almost impossible to valuate, but keep in mind that you’re not trying to put an objective number on them. Your goal is just to come up with an asking price to open negotiations with. If you want buyers to take this number seriously, you’ll need to demonstrate that you came up with these numbers in practical ways.
Putting a price tag on them will require resourcefulness and effort, but will pay itself off by earning you the best price you can get for your business.
Resources
Learn more about company valuation with these resources:
Showmethedata.com talks about measuring the value of data and measuring the seemingly unmeasurable:
How to Measure the Value of Data — 7 Ways to Inform Your Data Strategy
Investopedia on Calculated Intangible Value:
Visual Capitalist breaks down intangible assets with a helpful infographic:
https://www.visualcapitalist.com/intangible-assets-driver-company-value/
A previous article we published on practical valuation tools:
https://www.freevectoradvisors.com/2019/11/25/practical-valuation-tools/