The Core Formula for Startup Valuation

A baseline valuation for a startup, particularly for an acquisition, is determined by a core formula that multiplies a measure of its financial performance by a number known as the "multiple."

The Formula:

Estimated Value = (Earnings OR Revenue) x Multiple

Components of the Formula:

Earnings or Revenue: This is the financial performance metric used as the base. The choice of metric depends on the company's size and stage.
- For small, owner-operated businesses, this is typically Seller Discretionary Earnings (SDE).
- For larger businesses with a management team, it's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
- For high-growth, pre-profitability companies, it's often Annual Recurring Revenue (ARR).
The Multiple: This is a number that reflects the company's quality, growth potential, and risk profile. It is the most subjective part of the valuation and is influenced by Key Metrics That Determine a Valuation Multiple. A higher-quality business commands a higher multiple.

This formula provides a foundational, evidence-based starting point for negotiations with potential acquirers. A founder must be prepared to defend both their chosen financial metric and the multiple they've applied.