If you are yet to get your company valued, it is high time that you do it now. The value of your company is important to know for a variety of reasons. Understanding how much your business is worth can help you make informed decisions about things like marketing and expansion. It's also a good idea to get your company valued on an annual basis so you can track your progress and growth over time.
Importance of Business Valuation
Business valuations are needed when a company is looking to sell all or part of itself. This is where a 409A valuation calculator comes in handy. It allows both the buyer and seller to get an accurate estimate of the company's value.
To arrive at the valuation, different aspects of the company are analyzed, such as its management, future earnings prospects, capital structure, and the market value of its assets. The approach or combination of approaches used depends on the industry, business, and evaluator. But some of the more common ones include the market, income, and asset-based valuation methods.
Valuation is important for tax reporting purposes. The IRS requires companies to be valued at their fair market value. This valuation is used for events such as gifting shares, purchasing shares, or selling shares of the company. The IRS uses business valuation to ensure that the right amount of taxes is being paid.
How to use a 409A Valuation Calculator?
The business valuation calculator can help you determine the value of a company. Let's look at an example.
Suppose a retail company that has been in business for 3 years. It is starting to grow, but it is still an early-stage company. Now the company wants to take a step forward and raise seed funding. To do this, they need to determine the value of their company so they can decide how much funding they can get for how many shares. We are assuming that the company has 1,000,000 common shares. A 409A Valuation Calculator will require certain details to calculate the value:
- Type of industry
- Years in Business
- Number of Common Shares
- Total amount of Assets
- Total amount of Revenue
- Total amount of Profit
- Future Growth Rate
There are three primary methods for valuing a business: the income approach, the asset approach, and the market approach.
- Income Approach: This is a small business valuation method to obtain the present value based on cash flows. Then keeping in mind the changes in cost and taxes, the current valuation of the company is obtained. The income approach values a business based on its future cash flows. Using this method, our business is worth $430,104.34.
- Asset Approach: Because this method gives the exact value of the total number of assets owned by the company, this is the most preferred method of all. The asset approach values a business based on the value of its underlying assets. Through this method, our business is worth $400,000.
- Market Approach: Based on the market sources of the competitors, a value is assigned to the business. Lastly, the market approach values a business based on comparable valuation multiples in the market. This method values our business at $49,000.
All of these business valuation methods are reconciled and the final value of the company is determined using the 409A valuation calculator. The total value comes out to be $293,034.78 and the price per share for common shares is $0.29.
The IRC (Internal Revenue Code) requires that 409A valuations have a maximum validity of 12 months or until another material event occurs in the company. A material event is a process that can affect the company's stock price. In fact, for many startup companies, a qualified financing round is one of the most encountered material events. The qualified financing round can include the sale of preferred equity, common shares, or a convertible debt to an investor at a negotiated price.
There are a few times when you'll need a 409A valuation, which is basically a report that assesses the value of your company's stock options. You'll need one:
- Once every 12 months
- After a material event
- After raising a round of venture financing
- In case of an upcoming IPO, merger, or acquisition
You shouldn't use a simple online business valuation calculator to get an official 409A valuation for your company. For an accurate valuation, you need to hire a third-party professional to get an exact value from a 409A valuation calculator. That's where we can help. We have a team of experienced, certified professionals under the NACVA who can provide an audit defensible 409A valuation.
Determining the value of your company is critical for taking various actions and is also a positive thing for founders. By understanding what your company is worth with the help of a business valuation calculator, you'll be able to see where you stand and decide how far you want to take your company.