If you’ve ever watched an episode of Shark Tank on ABC, you would be familiar with the pitches contestant-entrepreneurs make to the Sharks asking for investments in their start-ups in exchange for a certain percentage of equity in the business. The entrepreneur may pitch something along the lines of “$250,000 for a 10% stake,” indicating he or she believes the entire business is worth $2.5 million.
Getting the Sharks to agree to that value, or come up with their own deal, is the crux of the show. While the start-ups that appear on Shark Tank do benefit from getting publicity, they are mainly there to get more funding for their venture. This is the primary reason many start-ups need to be valued. When start-up companies meet with potential investors (i.e. Sharks, Angels, Venture Capitalist Firms, etc.) and present an independent, third-party CPA valuation report, it helps remove some of the debate over the value of the company. This generally presents the entrepreneurs as more serious and more credible.
Other than obtaining funding, or appearing on an episode of Shark Tank, there are many other reasons a start-up would require a business valuation. Four of the additional reasons a start-up would require a business valuation are:
- Transactional purposes – Some entrepreneurs may be interested in having a business valuation completed when they are considering selling the business to another party. Instead of pulling a value “out of thin air” and potentially selling themselves short (or drastically overvaluing the business and possibly turning off investors), a valuation may help the business owner keep in mind a “floor price” of the lowest value they’re willing to sell the business for.
- Tax purposes – If the startup issues stock options as a form of compensation (which MANY startups do), the company may be required to get a business valuation in order to set the strike price of the options under Internal Revenue Code Section 409A. A valuation may also be necessary for gift and estate tax planning purposes.
- Management planning – Some business owners choose to track the value of their stock on a periodic basis (annually, bi-annually, etc.) for a variety of reasons, including internal financial reporting purposes or for the sale of stock by investors.
- Litigation – Many businesses, at some point, become a party in some type of litigation matter. In certain cases, the business may need to be valued as part of the litigation process in order to quantify damages, such as loss of business value.
While most start-up companies focus on valuing their business for capital raising purposes, there are many other scenarios in which a business valuation would benefit the company. To discuss the benefits of a business valuation for your start-up, or to determine if your company should have one performed, contact an Anders valuation expert.All Insights