How do you value your startup for an exit scenario?

There are a lot of factors to consider, like the size and growth potential of my market, the strength of my team and product, my competitive advantage, the financial performance of my company, the current market conditions, and the appetite for risk among investors. There are a number of different methods that can be used to value a startup, each with its own advantages and disadvantages. I think the best way to value my startup is to use a combination of methods. This will give me a more accurate picture of the value of my company.

Exit value depends on the type of ex- it. We can look at 2 basic scenarios. The first is a trade sale. In a trade sale the acquirer is looking for strategic benefits and cash flow. Naturally you should have a DCF valuation focused around the cash flows the business is capable of generating. The cost of capital should reflect the stage of the business and its overall riskiness. A business that is well established with steady cash flows should have a lower cost of capital, while a business that has volatile margins or highly variable sales prospects or requires a high level of investment in order to develop will require a higher cost of capital. The multiple approach (i.e. P/E, EV/EBITDA) should be used as a comparison tool.

During the negotiation of a startup exit, there is typically a disagreement on the value of the startup between the seller and the buyer. In this situation, there are multiple deal terms that can be brought into the negotiation that can bridge the disagreement gap. For example, an earn-out could be used. An earn-out is an agreement to make a post-close purchase price adjustment upon the completion of a milestone relevant to the value of the startup, e.g., the successful completion of a Phase II clinical trial. The result is that a deal can close, despite fundamental disagreements on the outlook of a company's future earning potential.

While it is important to have an exit strategy, it is also important to avoid a short-term view of a startup that ends at the exit. A company that takes a long-term view will often have more exit opportunities because the potential buyers will want to further increase value in the company upon ownership. A startup with a long-term view will typically have a roadmap for the next phases of growth, which will make the company more attractive to buyers. Startups that have a weak vision and strategy upon exit will find themselves with less potential buyers or no buyers at all.

In the case of a trade sale part of the value of the business should reflect synergies or benefits to the acquirer. Essentially the requirer will be valuing based on higher cash flows (reflecting synergies) than the seller might be valuing. The seller may be able to capitalise on this in the negotiating process.