Valuation: Definition, Influencing Factors, How to Calculate and the Level

Have you ever heard of the term valuation? This term is commonly used by startups as the main reference for attracting investors.

The reason is, valuation is a factor used to see business success in general. Valuation value is also dynamic and influenced by various factors.

So, what are the factors that affect the valuation value and how to calculate it? Check out the full explanation in this article.

Definition of Valuation

In general, valuation is an attempt to calculate the value of a company by looking at its management and performance. Several things determine the valuation calculation, including the quality of management, capital structure, total assets, and projected income.

Valuation is also considered very important for companies, especially companies that still need funds to develop. This is because startup companies that are still undergoing the acquisition process require a valuation as an estimate of the price offered to prospective buyers.

Factors Affecting Valuation

Valuation has a dynamic nature and can change according to the factors that influence it. So, what factors influence valuation? Here's a full explanation.

Business Sales Stability

Business stability is related to the balance of sales results obtained by the company. In this case, the sales figures greatly affect the valuation value, where if the sales figures increase, the valuation value will also increase.

Funding

Generally, startup companies that are still in the development process can stand up because they receive various kinds of funding or injections of funds. Funding can also be used to increase profits and influence valuations, which means that as profits increase, the selling value of the business also increases.

Good business selling points will attract many investors to inject funds into the company.

Business Model Success

One of the keys to the sustainability of a startup company is its business model. A business model that is unique and in accordance with the target market can usually survive changing times.

Meanwhile, business capital that does not meet consumer needs will affect valuation because it does not generate income. Therefore, the business model must always be adapted to market needs and the times.

Quality Management

Quality management can be used as a reference to see which companies have high valuations. The reason is, good management is proportional to the company's increased performance, causing the company to have good prospects.

In addition, quality management can prove that the company has good quality human resources.

Asset ownership

Every company must have assets, whether in the form of land, buildings, investments, and so on. The assets owned by this company can also affect the value of the valuation. The more assets owned, the higher the valuation value.

Industry Competition

The company must also have competitors who compete in the same industry. The competition that occurs between these companies is included in the relative valuation. That is, a company that is considered more promising than its competitors in the same industry will increase its valuation.

How to Calculate Valuation

There are 4 methods to calculate valuation, including:

Market Comparison

The first way to calculate valuation is by market comparison. The trick is to compare a company with competitors who have more or less the same income.

However, the results obtained from this method are only estimates. This is because there are various other factors that can affect the valuation value, such as assets, taxes, debt and so on.

Asset Valuation

Valuation value can also be determined from the value of assets owned by a company. The method is to reduce the total value of assets with the total value of debt owned by a company.

This method is considered to be able to measure valuations quickly. However, this method is considered less accurate because it does not take into account other factors that may affect the valuation value.

Discounted Cash Flow

Discounted cash flow is a way to calculate the potential of a company in an investment opportunity. Discounted clash flow used to estimate future cash flows.

The trick is to estimate the amount of income and expenses for some time to come. Then, subtract that number from your current total income and expenses.

The result obtained from this reduction is the net present value which shows the economic value of the business. Therefore, if a company's cash flow is predicted to increase, then the potential for business development is also expected to increase.

Revenue

In general, revenue is the total money generated from selling the product. To calculate the valuation using revenue, multiply the previous year's total gross income by multiplier industry.

Another way is to multiply earnings before interest and taxes (EBIT) or earnings before interest, taxes, depreciation and amortization (EBITDA) by multiplier industry.

Startup Valuation Level

Every startup company has a different valuation level. The following are several startup valuation levels, including:

• cockroach, which is the initial level given to every startup company that is new and has a low valuation.
• Pony, namely startups that have an economic value of up to 140 billion rupiah. This level indicates that the startup has successfully developed and easily attracts the attention of investors.
• Centaur, namely startups that achieve an economic value of 1,4 trillion rupiah. This level indicates that the company is more mature.
• Unicorn, namely startups that reach a valuation of 14,1 trillion rupiah.
• Decacorns, namely startups that have an economic value of up to 140 trillion rupiah.
• Hectocorns, namely startups that have an economic value of up to 1.400 trillion rupiah.

So, that's a complete explanation of valuation. From this explanation it can be concluded that from the valuation it can be seen the selling value of the company and its business performance.