Valuation (Finance) - The Personal MBA (2024)

Valuation is an informed estimate of the total worth of a company.

The higher a business’ revenues, the stronger the company’s Profit Margins, the higher its bank balance, and the more promising its future, the higher its Valuation. The higher the Valuation, the easier it is to borrow money, the higher the per-share price, and the higher the price in the case of an acquisition.

Valuation is also important if you intend to take on investors. Higher Valuations = more money per share sold to investors.

Many companies base their financial decisions on what will increase the business’ Valuation.

Josh Kaufman Explains 'Valuation'

Value-Based Selling helps you estimate the value of an offer, but how do you calculate the worth of an entire company?

Valuation is an estimate of the total worth of a company. The higher a business’ revenues, the stronger the company’s Profit Margins, the higher its bank balance, and the more promising its future, the higher its Valuation.

Many companies base their financial decisions on what will increase the business’ Valuation. Higher estimates of value are beneficial for many reasons. If a company is private, having a high Valuation makes it easier to borrow money. If the company is public, a high Valuation leads to a high share price and a profit opportunity for the shareholders. If another business seeks to acquire the company, a high Valuation leads to a big payday for the business’ owners or shareholders.

Valuation is also important if you intend to take on investors. The amount of Capital you raise, as well as the total amount of ownership you give to your investors in exchange, depends on the business’ current Valuation at the time of investment. The higher the business’ Valuation, the more money you’ll be able to command for every share you sell to the investor. (If you’re interested in how this works, I recommend reading Venture Deals by Brad Feld and Jason Mendelson.)

It’s important to note that Perceived Value applies just as much to businesses as it does to individual offers. When people believe a company has bright future prospects, the company’s Valuation increases. If people believe the company is in trouble, the Valuation decreases. This dynamic explains why some companies, like Amazon.com, have share prices equal to over 100 times the company’s most recent earnings per share report, while troubled companies sometimes sell for less than the liquidation value of their current assets.

Valuation is important to consider if you intend to sell shares of the company to investors, or are positioning your business for future acquisition. If you own your own business and never intend to sell it, Valuation considerations become less important. If you’re an executive of a public company, building a business you’d like to sell someday, or investing your capital in a company, Valuation may be on the top of your mind every day.

Questions About 'Valuation'

• Can you estimate you business’ current valuation?
• Is current valuation important for your business, or is it a secondary concern?

"The whole value of the dime is knowing what to do with it."

Ralph Waldo Emerson

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