Valuing a start up business - Essay Example

VALUING A START-UP BUSINESS al Affiliation) Discussion Valuing a start-up business is an aspect of evaluating how viable a business is in terms of profitability. This involves assessing the economic viability of that business and its impact to the community both in short and long terms. Market forces and the industry in which the business play forms the core determinant of a start up’s value (Beaton, 2010). This may include balancing demand and supply of money, willingness to pay premium in order to get into a deal and the return on investment.

However this valuation poses a lot of challenges especially for a start-up business. Challenge in valuating start-up businessNo historyHistory forms a very good foundation in evaluating and valuing a business. However, young companies have little or no history; many have only one or two years of data available on operations and financing (Audretsch & Link, 2012). This unavailability of data further compounds the valuation of a start up since data forms the major building block of any business valuation.

The amount of data accumulated from the start-up business dictates the ease with which the business can be valued. This means that the duration that a start-up has taken is very important in assessing its value. If a business has existed for quite long it becomes easy to value it as opposed to shortly existed business.Nonetheless, there are a number of alternative approaches that can be used in valuing a start-up business depending on the business in question. Selection of the approach is based on the nature of the business and the market.

One of such approach is valuing cash flow from existing businesses.Approach in valuating start up businessTime Value of Money TechniquesIn this approach the cash flow of already established business is evaluated. This will help know the expected return of the business and payback time of the business (Schell & Tyson, 2012). The cash flows of any business is examined using its present, future values and interests.Various ways of measuring cash flows are employed in order to analyze financial instruments like loans, bonds, and dividends.

These ways of measuring cash flows are Internal Rate of Return, Net Present Value, Annuities and Perpetuities. They are called time value of money techniques.Perpetuities-These are annuities which last forever under assumption. This means that when valuing company the dividend is considered as a perpetuity. These cash flows grow uniformly throughout the time.Annuities- this involves evaluating multiple cash flows across time. It helps in computing the present value of the business at a given interest using a single formula.

Net Present Value- this involves evaluating unequal cash flows, both positive and negative. A time value of money technique can be used in this case to generate the present value of future cash flows. This helps know the current amount an investment should be expected to give.Internal Rate of Return- this time value of money technique helps evaluate interest rate of an investment. It can also be defined as an interest rate that equates net present value to zero. (Yegge,2002). Several factors must be taken into account in this approach.

These factors include the opportunity costs, working capital, sunk costs, sales, overhead costs and salvage value.Advantages of these techniquesThese techniques show how the investment will improve a firm’s size, takes into consideration the time value of money and all cash flows. They also incorporate the future cash flows.Disadvantages of the techniquesThough these techniques have those benefits to the start-up evaluation they also have their setbacks. They require estimation of the cost capital so as to help calculate payback.

At times they may not necessarily to correct decisions when comparing mutually exclusive projects. You must also estimate the cost of capital for concrete decision.For instance, John Roberts wanted to start-up an outfitters shop in Johannesburg central business district. The major challenge was how to know the amount of resources he needed to set the business rolling. He had to evaluate the cash flow of outfitters businesses in CBD to know what he needed to invest and the expected payback. He put his emphasize on these factors: Scope of the business; value of the business; risk involved; efficiency of the business; capital structure; equity, debt, venture capital & uncertainty and Project finance.

BibliographyAudretsch, D. B., & Link, A. N. 2012. Valuing an entrepreneurial enterprise. New York: Oxford University Press.Beaton, N. J. 2010. Valuing early stage and venture-backed companies. Hoboken, N.J.: John Wiley & Sons.Tyson, E., & Schell, J.2012. Small Business For Dummies (4th ed.). New York: John Wiley & Sons.Yegge, W. M. 2002. A basic guide for valuing a company (2nd ed.). New York: Wiley.