Understand the Value of a Start-Up Company

Valuation for start-up enterprises can be a tricky proposition. Regardless of industry, start-ups generally share a common set of operational characteristics and valuation needs that are distinct from mature firms. Because both the subject enterprise and valuation purpose are misfits within the context of typical valuation work, typical valuation practices are generally not applicable for start-up companies.In recent years, valuation issues have become increasingly important due to changing IRS and accounting rules, as well as increasing regulatory and shareholder scrutiny, which together compound potential troubles for start-up companies.

In the past, industry specific start-up “rules of thumb” may have been sufficient to serve as reasonable basis for any valuation concern. While the simplicity of such rules can be appealing, the scrutiny of the IRS, SEC, and your auditors in combination with the potential liability associated with misreporting make it critical that value be determined and articulated in a credible fashion. In this article, we will discuss common circumstances that give rise to the need for a valuation, basic valuation concepts, and specific valuation considerations relevant to a start-up company.