Business Valuations: Understand the Valuation Process

Overview

For startups and small to mid-sized enterprises, determining the value of a business is often one of the most complex yet most consequential exercises management will undertake. Whether raising growth capital, preparing for a strategic transaction, evaluating internal investments, or supporting financial reporting decisions, a clear and defensible understanding of enterprise value is critical. Valuation is not a theoretical exercise. It directly influences investor negotiations, capital structure outcomes, dilution, lender confidence, and transaction success. For early-stage and growth companies in particular, value is often shaped as much by methodology and assumptions as it is by historical performance.

Business Valuations Can Be Complex

Many startups and privately held companies operate without frequent market pricing of their equity. Unlike public companies, where value is continuously observable through market capitalization, private enterprises must rely on analytical frameworks to estimate value based on financial performance, growth expectations, risk, and market conditions. This challenge is magnified when:

• The company has limited operating history

• Financial performance is inconsistent or rapidly evolving

• Capital structures include preferred equity, multiple share classes, or complex investor rights

• The valuation is being scrutinized by sophisticated investors, auditors, or regulators

For companies with investments in other private entities, or for founders seeking external capital, understanding how stakeholders evaluate value is essential to anticipating outcomes and avoiding misalignment.

Valuation Approaches

While valuation is as much an art as a science, market practice generally relies on three primary approaches. Selecting the appropriate approach or combination of approaches depends on the availability and reliability of information, the nature of the business, and the purpose of the valuation.

Market Approach

The Market Approach estimates value by comparing the subject company to similar companies or transactions observed in the market. This approach is commonly used when reliable, relevant market data is available.

Core Mechanics

Under the Market Approach:

• Revenue or EBITDA is typically used as the baseline performance metric

• The subject company is compared to:

• Guideline Public Companies (GPCs), or

• Guideline Transaction Comparables

• An implied Enterprise Value (EV) is derived by applying market multiples

The fundamental calculation is:

Revenue or EBITDA × Market Multiple = Enterprise Value

Source of Market Multiples

For public comparables:

• Market capitalization is calculated as share price × total shares outstanding

• Equity Value (value of company attributable to shareholders) is derived by adjusting market capitalization or EV for net debt

• Revenue or EBITDA multiples are calculated by dividing Enterprise Value by the applicable performance metric

These publicly observable multiples provide a reference point for inferring value for a private company with similar operating characteristics.

LTM vs. NTM Metrics

The selection of the performance metric depends on the company’s maturity and growth profile:

• Last Twelve Months (LTM) metrics are typically used for more established businesses with stable operating histories

• Next Twelve Months (NTM) metrics are often more relevant for high-growth companies where forward-looking performance better reflects value

In many early-stage or high-growth businesses:

• Revenue multiples are more commonly used due to inconsistent or negative EBITDA

• EBITDA multiples are more appropriate for established companies with predictable margins

Enterprise Value to Equity Value

Enterprise Value represents the value of the entire business independent of capital structure. To arrive at Equity Value:

• Net Debt is subtracted from Enterprise Value

• Net Debt = Total Debt minus Cash

• The remaining value is allocated to shareholders through a waterfall analysis

Capital Structure Considerations

For companies with complex capital structures:

• Different preferred equity series may have:

• Liquidation preferences

• Participation rights

• Preferred rates of return

• These features impact how value is allocated among shareholders

As a result, valuation outcomes can vary significantly depending on capital structure mechanics, even when Enterprise Value is unchanged.

Income Approach

The Income Approach values a business based on its ability to generate future cash flows, discounted back to present value. This approach is often used when forward-looking financial information can be reasonably estimated.

Cash Flow Projections

Under the Income Approach:

• Value is derived from projected cash flows over a defined forecast period

• Projections typically include:

• Revenue growth

• Operating expenses

• Capital expenditures

• Changes in working capital

These cash flows form the basis of a Discounted Cash Flow (DCF) analysis. Projected cash flows are discounted using a rate that reflects the risk profile of the business. This rate is commonly expressed as the Weighted Average Cost of Capital (WACC).

Cost of Debt

• Represents the pre-tax cost the company would incur to borrow funds

• Adjusted for the tax deductibility of interest expense

• Weighted based on the company’s capital structure

Cost of Equity

Represents the expected return required by equity investors and is typically derived using:

• Risk-free rate

• Equity risk premium

• Levered beta

• Size premium

• Company-specific risk factors

The weighted combination of cost of debt and cost of equity results in the WACC.

Terminal Value

Because companies are assumed to operate beyond the explicit forecast period, a Terminal Value is calculated to capture value beyond the projection horizon. Terminal Value is commonly estimated by:

• Applying an exit multiple derived from guideline public companies or transactions to the final forecast-period EBITDA

• In Real Estate this is referred to as a capitalization rate (or Cap Rate), which is supported through other similar properties and transactions

Total Value Calculation

Total value under the Income Approach equals:

• The Net Present Value (NPV) of projected cash flows during the forecast period

• Plus the NPV of the Terminal Value

• Less Net Debt

This produces an estimate of Equity Value consistent with the company’s risk and growth profile.

Cost Approach

The Cost Approach is less commonly used but may be appropriate when:

• There has been a recent arm’s-length transaction involving the company’s securities

• The transaction price is representative of fair value

• Sufficient market or income-based data is unavailable

This approach is often considered when valuation is anchored to observable transaction evidence rather than projected performance.

Selecting the Appropriate Approach

Choosing the correct valuation approach is critical:

• Income Approach is most appropriate when future cash flows can be reasonably estimated (typically for real estate or companies that have contractual cash flows)

• Market Approach is most appropriate when reliable, relevant comparables exist and financial information is readily available

• Cost Approach may be relevant when recent transactions provide direct valuation signals

In practice, multiple approaches are often used to triangulate value and assess reasonableness. Valuation outcomes are shaped as much by assumptions, inputs, and methodology as by financial results themselves. Institutional-grade valuation work requires technical rigor, judgment, and a deep understanding of how stakeholders interpret value.          

The Importance of Engaging a Valuation Specialist

While valuation frameworks are well established, the application of those frameworks requires judgment, experience, and a deep understanding of how assumptions, inputs, and methodology influence outcomes. Small changes in growth rates, discount rates, comparable selection, or capital structure mechanics can materially impact valuation conclusions.

Engaging a valuation specialist helps ensure that:

• Appropriate valuation approaches are selected based on the company’s facts and circumstances

• Assumptions are internally consistent, defensible, and aligned with market practice

• Comparable companies and transactions are relevant and up to date

• Capital structure complexity is accurately reflected in equity value allocations

• Valuation conclusions can withstand scrutiny from investors, auditors, boards, and regulators

For founders and management teams, this expertise is particularly valuable during capital raises, strategic transactions, and periods of rapid growth, when valuation outcomes can have long-lasting implications.

How Evergold Advisory Supports Valuation Needs

Evergold Advisory provides independent, technically rigorous valuation services tailored to startups and enterprises of all sizes navigating capital formation, growth, and transaction events. Our approach combines institutional-level valuation methodologies with a practical understanding of how investors, auditors, and other stakeholders evaluate private company value.

We work closely with management teams to:

• Develop valuation analyses grounded in the company’s operating realities

• Apply market, income, and cost approaches appropriately and consistently

• Translate complex valuation mechanics into clear, decision-useful insights

• Support valuation conclusions in discussions with investors, boards, and auditors

• Work in line with the company’s valuation policies

By combining technical depth with hands-on advisory support, Evergold helps clients anticipate valuation outcomes, reduce execution risk, and build credibility with stakeholders before valuation matters become critical. If you are in need of valuation services for your company or other investments, contact us at info@evergoldadvisory.com.