Understanding Business Valuation: A Guide for Founders
Determining your company's worth is both an art and a science. This guide breaks down the core concepts to help you get started.
Why Valuation Matters
A credible valuation is your foundation for successful fundraising, negotiating a sale, or even strategic planning. It empowers you with the data to confidently articulate your company's value to investors, buyers, and partners.
Seller's Discretionary Earnings (SDE) Multiple
Common for small businesses. SDE is your pre-tax profit before accounting for a single owner's salary, non-cash expenses, and non-recurring expenses. A multiple (e.g., 2-4x) is applied to this figure. It shows the true earning potential for a new owner.
EBITDA Multiple
Used for larger companies. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Like SDE, a multiple based on your industry, size, and growth is applied. This method is favored by private equity and strategic buyers.
Discounted Cash Flow (DCF)
This method projects your company's future cash flow and then "discounts" it to its present-day value. It's more complex but highly valued for businesses with predictable, long-term revenue streams, like SaaS companies.
Asset-Based Valuation
This method calculates the total value of your company's assets (tangible and intangible) minus its liabilities. It's often used for businesses that are not profitable or are being liquidated, as it provides a "floor" value for the company.