How to Value a Business: Methods for Startups and Established Companies

This article explains the various tools investors use to estimate your company’s value. But to understand why one type of investor may offer more than another, or propose a different purchase structure, read this site’s article Your Best Acquirer: It describes which buyer type may fit you and your company best.

Introduction

Investors (VCs, PEGs, family offices, strategics, etc.) estimate a company’s value beyond the sum of its parts by projecting future cash flows—when they will arrive, from what sources, and in what quantities. They can do that with some precision for established companies. But for very young ones with little or no revenue, they must make educated guesses. Put another way, investors use different valuation techniques that align with the maturity of their target.

Valuing the Startup

The value of “launches” (the earliest stage of startups, also called “zero-stage” businesses) lies in three broad categories: an idea, secondary research, and the founding team.

Technique #1: Go/No-Go
So, the first investors on the scene look for:

• A unique idea for a product or service with low production costs.
• Secondary research that supports the existence of a large “blue ocean” market, one with weak or no competition.
• Strong management quality: That’s 1) a team comprised of individuals with complementary and relevant skill-sets (for example, a charismatic, driven CEO and an experienced R&D specialist; 2) a track record with connections in the industry at hand.

Most angels pass on companies that fail to display these non-financial signals. Of course, friends and family may proceed regardless.

Technique #2: Forget About Value for Now
Assume a startup survives the Go/No Go exam, but its value remains unclear. In that case, angels may simply kick the can down the road, passing it on to the next round of investors. They’ll presumably have more actual market performance data to weigh.

Angels do so with an instrument called the SAFE or Simple Agreement for Future Equity. It prices equity at whatever later investors are willing to pay. Of course, if there is never a next priced round, the angel’s SAFE investment never realizes an arm’s-length valuation unless the company or its assets are sold.

Technique 3: Convert Achievements and Circumstances into Dollars
Investors who believe the time is right to price the startup might do so by quantifying the value of specific stages, milestones, and other factors associated with the activities and circumstances of winning startups.

One such approach is the Berkus Method, which assigns a fixed dollar value to each successive milestone achieved. Example: The company has a working prototype that customers like. That’s worth from $1 million to $1.5 million. Add all milestones achieved so far to estimate value.

A more nuanced approach focuses less on what the company has done and more on its circumstances. Say you know how early-stage companies in a given industry score across factors such as team strength (0% – 30%) and competitive environment (0% – 20%), with zero competition being 20%. At the same time, you also know the price of those other companies’ first-round shares.

After adding up the percentages of all your startup’s factors, you get 140%. So, your startup’s first round value is 1.4 times greater than the average first round valuation for companies in its industry.

Other examples of this approach include the “Scorecard Method” and the “Risk Factor Method.” For a handy list of ways like these to value companies without revenue, see the Brex website. Some common examples of the non-financial signals they use:

• Size of addressable market;
• Degree of competition
• Vulnerability to product substitution (thank you, HBS Prof. Michael Porter)
• Again, management team quality (See more details on the traits and circumstances of the successful founder at Characteristics of the Successful Entrepreneur)
• Regulatory constraints
• Litigation exposure
• Substitutes for revenue (like “eyeballs” or even measures of prospects’ intention to buy)
• So-called “blocking” IP (like key patents that are hard to circumvent)
• Expected expenses based on comparables analysis
• Milestones reached (further described below)
• And any other characteristics evident from common sense.

Valuing the Established Business

Technique #1: Thumbs-Up

Rules of thumb use a fixed multiple of a financial or operating metric. Two examples: 1) In the heating and air conditioning business, .5 x revenue, or 2) For medical practices, acquirers use 1.5 times revenue. (See Business Reference Guide for hundreds more examples.)

Among rule-of-thumb methods, the most popular metric that’s multiplied is EBITDA, as in “5x EBITDA.” (This despite the fact that EBITDA, earnings before interest, taxes, depreciation, and amortization, overstates cash and “cash is king.”)

While a rule of thumb may capture time-honored valuation wisdom for a specific industry, be cautious about relying on it. You rarely know what evidence supports a rule’s use of a specific multiple, and even then, using it wouldn’t account for the unique differences between two companies serving the same market with the same product. For instance, one of those companies may be growing much faster than the other.

Technique #2: Net Present Value
There are two more accurate but complex approaches when complete financial data is available, and they’re typically used in tandem. The first is the present value method. It requires that you estimate the amount of cash the target will generate over the number of years you own equity in it. The cash comes from company operations (so-called “organic” returns) and from “liquidity events” (such as M&A, IPOs, loans, etc.).

After you estimate the amount of after-tax cash generated each year, the present value approach asks you to reduce those payments (or to “discount” them) to account for risk and time. Then you add all these payments together to arrive at a single number, the present value.

Last, when you subtract what you invested from the present value, what’s left is the net present value (or NPV). A positive net present value indicates that what you’re putting into the business may generate a positive return on investment (ROI).

For a concrete example of how to calculate NPV, see below. (In it, we’ll use “K” to indicate thousands of dollars):

• At the beginning of 2021, you decide to buy half of Felicia’s fledgling GPS software company called “Softwhere” for $75K. You estimated Softwhere’s present value of $150K by applying a 50% discount rate to a few years of future cash flows. A 50% annual discount rate is brutal, but it actually understates the risk of failure for early-stage companies. By the end of 2021, Softwhere generated $50K, and you two split the cash 50/50. So, you got back $25K in cash with a PV of $12.5K ($25K x 50%).
• At the end of 2022, Softwhere pumped out more cash, this time $150K. Your slice was $75K. Even though in 2022 you received $75, which was three times what you received in 2021, the risk that you could have received nothing reduced the present value of your $75K to $18.75K ($75K x 50% x 50%).
• In 2023, you and Felicia got an offer you couldn’t refuse. You sold the company to a competitor for 5x 2022 cash flow. That’s $750K. Your 50% share, $375K, has a PV of $46.9K ($375K x 50% x 50% x 50%).
• So, what’s your NPV? Three years of discounted cash flows generated a PV of $78.2K. (That’s $12.5K in Year 1 + $18.8K in Year 2 + $46.9K in Year 3.) After subtracting your $75K investment, you squeaked into positive NPV territory: $3.2K.

It turned out your investment was barely worth it. But if you hadn’t used PV, you would have been mightily impressed by your $400K net return ($475 minus your $75 investment). Still, don’t forget the risks and the time you’ve invested in earning that $400K. They were substantial. And your return doesn’t include taxes

While the math above is simple, it’s tedious. Reduce it by using a handheld or online calculator.

The Three Devils in NPV Calculations
Notice how the example above requires that you press carefully on three sensitive levers to make a value estimate:

1. The level of risk
2. How much you get back
3. When.

So, First Thing, Set a Realistic Discount (or Risk) Rate
With startups, the greatest contributor to the discount rate by far isn’t how much you’re sacrificing by not investing your money elsewhere or by not having it handy. It’s the strong chance that the business will run off the rails.

According to research by Harvard Business School professor Shikhar Ghosh, about 75% of venture-backed startups fail to return cash to investors. Startups without VC backing have even higher failure rates.

Then the Most Difficult NPV Step: Estimating Exit Multiple and Timing
What should you use as a multiplier when trying to figure out what your business might sell for five years out (something called “terminal value”)? Any number of things — cash flow, EBITDA, sales, employee headcount, etc. You find multipliers from the financials and M&A transactions of comparable companies.

Technique #3: Comparables Analysis
The second of the two most widely used techniques, “comparables analysis,” involves compiling data from companies you believe share commonalities with the business you’re valuing. Ideally, you get lucky and find their cash flow multiples, either from their M&A transactions or from the prices that the public pays for their shares. You want cash flow multiples because you’re trying to predict cash returns.

After you find that collection of comparable companies, you further hope to adjust your estimate by noting ways they may differ from the company you’re valuing. Examples: working capital, growth, extraordinary expenditures, etc.  Today, AI plays an increasingly significant role in these complex calculations.

All this work estimating timing and exit multiples from a comparables analysis is worth the effort because the multiple you earn by exiting often accounts for as much as 85% of your total present value. One reason this is true is that the intervening years generate comparatively little cash, and discounting rapidly erodes even those amounts. (In the NPV example above, note that Softwhere’s terminal value accounted for 60% of the total NPV return.) Regarding timing, most VCs and PEG investors aim to exit within 5 years.

Bringing It All Together

M&A advisors typically compare the results of both techniques—net present value and comparables analysis—to estimate a value range. Ideally, the two sets of numbers agree.

Adjust Again for Specific Buyers and Bidding Competition 
All the above is well and good for setting general expectations, general in the sense that you may not have a clear idea of who the likely buyers are.

But as you go to market and come face-to-face with a specific buyer pair, you’ll also want to know more precisely what strategic synergies may be in play. Examples: economies of scale, IP valuable to the buyer, and effective management. In other words, why is that specific buyer interested in purchasing your company? Last, as the seller entertains letters of intent, its alert M&A advisor will further adjust valuation expectations by assessing the level of competition among bidders.

Caveat Venditor
Buyers only buy when they think the target company is more valuable than the price they’re paying. The question is: how much more valuable is it, and does the buyer receive all that value? Welcome to “the art of the deal,” a place where sell-side M&A advisors live.

Should Sellers Estimate Value Before Going to Market?

Of course. Without a firm understanding of value, both buyers and sellers risk wasting time on dead-end negotiations and leaving money on the table.

Got questions about how to value your company? Email us
Revised 2/3/26. © 2026 Kuhn Capital, Inc. All Rights Reserved