Calculating valuation as the total value of assets minus total liabilities is a good approach but not for all businesses. For instance, consider a printing startup having a $2M machine with another debt of $1M. Now, its valuation would be $1M but that’s too early to predict it this way. Being a startup, it might fail well before clearing the machine’s debt only. Or it may rise too high, becoming capable enough of installing more such machines. So, let’s understand the approach and why it’s not apt for every venture.
Why Asset-based Valuation Isn’t Suitable for Startups?
To start with, the first reason lies in the number of tangible and intangible assets. New entrepreneurs rely mostly on teams, skills, patents, and software. Valuing all those intangible assets is quite difficult and startups usually don’t have the tangible ones.
Moreover, for startups owning tangible assets, it shouldn’t be the only factor for value analysis. Considering the limiting sum available, the company’s value incorporates the value of assets and the internal factors such as idea quality, processes, and products, etc. This combination is what defines the potential of revenue a company can generate, thus defining the true value of the startup.
Inability to Measure Intangible Assets
Since most startups operate with intangible assets, using them to assess the value of a business isn’t possible either. That’s because of an unknown book value of things like domain names, client portfolios, and patented technologies. However, their ability to improve market share, competition protection, and generate future cash flows can be considered.
Thus, if you are looking for the right business valuation for your startup, you should hire experts to make the most accurate projections.