4 Common Valuation Methods That are Generally Accepted

Here are the four common valuation methods that are generally accepted:

1. The Berkus Method: This valuation method is based on the key success factors which will eliminate or manage certain risk to the investors. The key success factors includes
• Sound Idea (basic value)
• Prototype (reduces technology risk)
• Quality Management Team (reduces execution risk)
• Strategic Relationships (reduces market risk)
• Product Rollout or Sales (reduces production risk)
2. Discounted Cashflow Method (DCF): For startups, potential value outweighs current earnings. DCF discount rates can range from 30-60%, depending on maturity and credibility of financial estimates. Forecasting long-term growth rates can be challenging and uncertain, so it's important to quantify earnings realistically when using DCF.
3. Price to Earning (PE) Method: Valuing a matured startup that has passed the breakeven point can be estimated using the earnings before interest, taxes, depreciation and amortization (EBITDA) multiplied by a multiple. The target multiple can be obtained from industry average tables or derived from key business factors, with the final average being the "multiple".
4. ‘Comparable’ method: This method to establish valuation for any company is to search for similar companies that have recently received funding which is similar to the common real estate appraisal concept that values your house for sale by comparing it to similar homes recently sold in your area. Don’t forget the old real estate adage of “location, location, location”.  If your business is physically located in just the right place at the right time, then be sure to include this factor into your valuation estimate.