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April 14, 2022 | 3-minute read (415 words)
Startup valuation frequently boils down to one of two main approaches: top-down or bottom-up. The top-down technique assists you in determining the worth of your business based on the size of the addressable market and predicted market penetration, as well as the pre/post-money valuation of similar firms.
Startups with a proven financial track record, on the other hand, can take a bottom-up strategy and apply discounted cash flows or other more complex valuation approaches. Alternatively, they may just use the EBITDA multiple to determine the worth of their company.
However, even EBITDA-based valuations employ varying multiples for firms in different industries when it comes to selling or funding. Some are valued at 25 times EBITDA and others are sold for just 2.5 times EBITDA. According to Equidam data from November 2021, enterprises in the coal industry sell for an average multiple of 5.59 X EBITDA, while software companies are valued at 30.92 X EBITDA.
This begs the question: Why are certain investors prepared to pay a premium for certain firms while others are not? It's because they're on the lookout for new ideas.
Investors are drawn to cutting-edge technology firms and are constantly seeking new ways to cut costs, enhance performance and increase profits. As a result, a greater valuation (i.e., a larger earnings multiple) implies that investors have higher expectations for the company's future profit potential and growth.
Accounting
Finance
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