Startup Valuations: 7 Things to Look for in a Valuation Company
Valuation. You know you need one. Annually. What you may not know is that it really does matter who performs your valuation. There are a lot of valuation companies out there, so I know many entrepreneurs are tempted to just shop around until they find the lowest price, but this is a mistake. A valuation is more than just a commodity. All valuations are not created equally; there are better valuations, better processes, and better valuations business partners for your company.
To find the best valuation company—and get your best valuation—here’s what you should be looking for:
1. Early-stage startup experience
There are a lot of different types of valuation, including four levels of 409a valuations: Seed, Series A, Series B, and Series C. You want a valuation firm that has experience with all types of valuation for companies like yours, including stock option management and complex capitalization tables. Even if you’re only looking for a particular valuation type right now, further down the road you’ll need a new valuation and it’s nice to have an established relationship with a valuation firm that can manage it all—and offer discounts on future valuations.
2. Guarantee
Any reliable valuation company should put its money where its mouth is and guarantee to satisfy your audit. There should be some sort of guarantee about the accuracy of their valuation and its ability to withstand scrutiny.
3. AICPA-compliant valuation reports
If you get acquired, the acquiring company is going to request an audit—they will be looking closely at your 409a valuation. If the valuation firm made certain assumptions or didn’t address certain things in certain ways, this could slow down the acquisition and/or have a negative economic result. A valuation firm that advertises AICPA-compliant valuations that endure Big 4 and acquirer scrutiny is demonstrating that they have the necessary rigor you need to make it through an acquisition as smoothly as possible.
4. Variety of approaches
From income approaches to market approaches to cost approaches (and don’t forget custom methods!), you want a valuation company that knows all the tools of the trade and will use the best combination of business valuation methods to get you your best valuation.
5. Fast
Whether you’re on your way to acquisition or on the hunt for talent and need to make a quick offer, when you need your valuation, you need it. Valuation companies should be able to promise a quick turnaround—within 7 days—and fast, free revisions, as necessary.
6. Availability
It makes sense to have an actual relationship with your valuation firm. They need to make themselves available to you and be open to necessary dialogue about valuation inputs, assumptions, special circumstances, etc.
7. Integrated approach
While some entrepreneurs choose to use a stand-alone valuation service, it makes more sense to have a more integrated approach to your financial needs, of which valuation is just one puzzle piece. If there is a seamless integration between your financial management and your valuation, that promises a faster, smoother valuation process. For your valuation, you’ll need to supply relevant financial documents such as GAAP compliant financial statements, capitalization tables, balance sheets, profit and loss statements (P&L), and tax returns. If you have a firm already managing these finances, it makes sense to use them to handle your valuations as well.
Valuation is one of those non-mission critical, yet essential things that every startup needs to have. As with all non-mission critical functions, it’s something that needs to be taken off your hands by someone you can trust who will deliver quality results. The right valuation company will understand your business and guarantee that you get a price that’s appropriate.
What do you look for in a valuation company? Tell us about it in comments below | Images via Shutterstock
