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7 business valuation methods: what's your company's value.

Establishing an accurate value of a business, whether you’re on the buy-side or sell-side , is an essential component of extracting value from a transaction.

The most successful investors of all time are those that are better able to value assets .

And while you can add value to a transaction through a successful integration , paying the right price for a company gives you the best platform to do so.

In this article on business valuation, DealRoom borrows from some of the insights into valuation provided by colleagues that contributed to our sister site, M&A Science, as well as DealRoom founder Kison Patel.

What is Business Valuation?

Business valuation, also known as company valuation, is the process through which the economic value of a business is calculated. The purpose of a valuation is to find the intrinsic value of a company - its value from an objective perspective. Business valuations are mostly used by investors, business owners and intermediaries such as investment bankers, who are seeking to accurately value the company’s equity for some form of investment.

Understanding Business Valuation

Although business valuations are *mostly* used to value a company’s equity for some form of investment, this isn’t the only reason to have an understanding of a company’s value.

A company is not unlike most other long-term assets, in that it’s useful to have a handle on how much its worth.

Being in an informed position at all times enables the company’s owners to understand what their options are, how to react in different business situations, and how their company’s valuation fits into the bigger picture.

The objectives for valuing a business can be divided into: internal motives, external motives, and mixed motives (being a combination of internal and external motives).

The Business Valuation Process

The business valuation process differs depending on which method is chosen.

Whatever method is chosen, the aim is the same: To find the company’s intrinsic value.

Depending on the company and or/the individual conducting the business valuation process, the method can differ.

For example, should a company be measured based on its assets, its future free cash flows, recent transactions for comparable companies, or the sum of its real options?

More often than not,  valuation professionals seek to use a combination of these to arrive at an answer.

The valuation methods they use are summarized in the table below

More often than not, business valuation professionals use at least two methods when valuing companies, the most common being the DCF method and comparable transactions.

These methods are popular because they’re widely understood, but also because the underlying numbers are easier to obtain.

In the case of real options valuation, for example, the numbers which underpin the company valuation are far more difficult to objectively ascertain.

Business Valuation Methods

• Discounted Cash Flow Analysis
• Capitalization of Earnings Method
• EBITDA Multiple
• Revenue Multiple
• Precedent Transactions
• Book Value/Liquidation Value
• Real Option Analysis

1. Discounted Cash Flow Analysis

Discounted cash flow analysis uses the inflation-adjusted future cash flows to project a value for the business.

The thinking behind DCF Analysis is that free cash flows are what endow shareholders with value, so FCF is the only number that matters.

The problem then arises of how to accurately project discounted FCF, using a weighted average cost of capital (WACC) several years into the future.

Even small differences in the growth rate, the perpetual growth rate and the cost of capital can lead to significant differences in valuation, fueling criticism of the method.

2. Capitalization of Earnings Method

The capitalization of earnings method is a neat, back-of-the-envelope method for calculating the value of a business, which in fact is used by DCF Analysis to calculate the perpetual earnings (i.e. all those earrings that occur after the terminal year of the DCF Analysis being performed).

Sometimes called the Gordon Growth Model, the Capitalization of Earnings Method requires that the business have a steady level of growth and cost of capital.

The numerator, usually the free cash flow, is then divided by the difference between the discount rate and the growth rate, expressed as fractions to arrive at an approximation of a valuation.

3. EBITDA Multiple

The EBITDA multiplier is an excellent solution to the arbitrary nature of most valuation methods. Even Aswath Damodaran, the father of modern valuation says that any valuation of a business should follow the law of parsimony: the most simple of two (or more) competing theories should hold sway in an argument.

On this basis, the EBITDA multiple - the multiplication of this year’s EBITDA figure by a multiplier agreeable to both the buyer and seller - is an elegant solution to the valuation dilemma.

Even those who consider this method too simplistic tend to use it as a guide for their valuations, underlining its strength.

4. Revenue Multiple

This is essentially the same as the EBITDA Multiplier method with one advantage: It can be used in those circumstances where EBITDA is either negative or isn’t available for some reason (usually because sales figures are the only ones available when researching firms to acquire through online search).

Again, while you might say it’s just a benchmark - others would argue, with some justification, that the total sales of a business is the most important benchmark of all.

5. Precedent Transactions

This method may incorporate the EBITA and revenue multipliers or any other multiple that the practitioner so wishes to use. As the title suggests, here the valuation is derived from comparable transactions in the industry.

So, for example, if widget makers have been trading at multiples of somewhere between 5 and 6 times EBITA (or net income, or whatever indicator is chosen), Widget Co. would establish its value by performing the same iterative process.

The problem that then arises, is how similar are companies to others, even in their own industry?

Thus, for our money, this is more of a barometer of the market than a valuation method per se.

6. Book Value/Liquidation Value

The liquidation value,(which is essentially the same as the book value) is what Warren Buffett claims to have always looked at when seeing if businesses are overvalued on the stock market or not.

The liquidation value is the net cash that a business would generate if all of its liabilities were paid off and its assets were liquidated today.

In a sense, calling this a valuation method for a business is a misnomer - this only gives you the value of part of the business.

But, to paraphrase Buffett, it allows you to see the ‘margin of error’ that you have with a valuation.

The logic goes that, even if everything goes wrong in management and the company’s sales fall dramatically after the acquisition, it can always fall back on the liquidation value.

7. Real Option Analysis

Proponents of real options analysis look at businesses as nothing more than a nexus of real options: the option to invest in opportunities, the option to utilize spare capacity, the option to hire more salespeople, etc.

Bringing together these options is the basis behind real options analysis for valuation.

This is most effective for firms with uncertain futures, usually those who aren’t yet cash generative: startups and mineral exploration firms, for example.

Of the valuation methods on this list, it’s by some distance the most complicated but its proponents include McKinsey and several of the world’s most prestigious business schools.

How to Pick the Right Valuation Method?

The last section mentioned how most business valuation professionals use at least two methods of valuation, and also that the valuation (the output) will ultimately only be as good as the numbers uesd to achieve it (the inputs).

After conducting a preliminary analysis of the company, whoever is conducting the valuation chooses the method, which is most suitable to the business and its industry.

There is no question that the biggest determinant of the valuation method used is available informtion. To take the example of comparable transactions, without any reasonably comparable transactions, there is no way that this valuation method can be conducted.

Here is an example of intangible assets valuation.

Even transactions in the same space from several years before cannot be considered accurate representations of a company’s value in the current environment.

In a similar vein, even the most commonly used valuation method, the DCF method, requires users to forecast free cash flows to a pre-determined point in the future. Only in the most extreme cases - for example, a company with a remarkably small number of clients and pre-agreed contracts - is this feasible.

But information is just one of the factors which should determine which is the right valuation method to choose. The others are as follows:

Type of the company

If a company is asset-light, such as is the case with many service companies, it makes little sense to use the net-asset valuation method. Similarly, if most of a company’s value is in its branding or IP, it may make little sense to use the discounted cash flow method.

Size of the company

Larger companies tend to be applicable for a larger number of valuation methods. Small companies, with less information, are usually only subject to a handful of valuation methods. Bear in mind too that different valuation considerations are at play for each (e.g., higher valuation multiples for larger companies).

Economic environment

Regardless of which method chosen, it’s never a bad idea to consider the economic environment that teh company faces. But in more positive economic conditions, it’s important to be somewhat conservative when valuing in the understanding that all business cycles come to an end.

A further consideration for valuing a company is what the end user requires the valuation for. Some buyers will only look to the value of a company’s fixed assets, be that technology, real estate, or even trucking. Others will only be interested in cash-flow generating potential (as is the case with most buyers of SAAS platforms).

How to carry out a successful valuation

There are a few ways in which a valuation professional can ensure that, whatever the valuation method they choose, they’ll arrive at a number which approximates intrinsic value.

Successful valuation factors are:

A valuation which is heavily influenced by an opinion can be regarded as just that - an opinion.

The valuation should consider as much as possible; not just a company’s assets or its cash flows, but also its environment, and other internal and external factors.

Holistic does not mean detail for the sake of detail. Valuing Amazon doesn’t require making projections about the future prices of cardboard packaging.

Justifiable

Anyone reading the valuation should be able to arrive at the same conclusion as the individual conducting the valuation based on the information provided.

Business valuation providers

Business valuation is the bread and butter of investment banks and M&A intermediaries.

Even if a company has the wherewithal to conduct their own business valuation, it pays to hire a third party specialist for the expertise that they bring to the task. Even legal firms now typically have an in-house valuations expert.

Depending on the valuation method(s) used by the business valuation providers, the company can change the inputs over time to see how their valuation evolves.

Business Valuation: Part art, part science

The minute-by-minute fluctuation of the stock prices reflect the reality that there can never be a true consensus on a company’s valuation: Everybody has their own.

This is also reflected by the analysts’ reports on public companies, all of which suggest a price range, as well as attraching a  ‘buy’, ‘sell’ or ‘hold’ tag to covered stocks. In some cases, the range suggested by the analysts can be as much as 20% of the stock’s current price - hardly a specific valuation.

Blue chip Investment banks, keen to let everybody know that they’re hiring the best quantitative analysts in the world, can also vary widely on price.

The upcoming IPO of British chip manufacturer ARM is a case in point.

The value of the IPO pitched by investment banks has ranged from $30 billion to $70 billion - a massive $40 billion difference. Most of these bankers will be wrong by billions of dollars, illustrating the difficulty of business valuations.

Closing Remarks

Any valuation model is only as useful as the inputs used.

Perhaps what links all of the methods mentioned here is that their users have, at one time or another, plugged numbers into a model which gave a number they thought was erroneous, only to replace the numbers moments later to arrive at a number they considered ‘more reasonable.’

The best advice is to use as many measures as possible to arrive at a valuation, assuming the data are available to you. The more insights you can garner on its revenues, EBITDA, free cash flows, assets and real options, the better a perspective you gain of the company’s true value.

DealRoom makes the M&A process seamless and efficient. Whether you're a first-time acquirer or a seasoned M&A professional, DealRoom has something for everyone. Whether you need an advanced M&A pipeline tool to enable pipeline management and reporting or a data room software, talk to DealRoom today.

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

• Business Model FAQs

The Bottom Line

Learn to understand a company's profit-making plan

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Laura Porter

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

• A business model is a company's core strategy for profitably doing business.
• Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
• There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
• The two levers of a business model are pricing and costs.
• When evaluating a business model as an investor, consider whether the product being offer matches a true need in the market.

Business Model

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business models attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

• Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
• Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
• Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
• Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
• Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
• Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
• Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

• Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
• Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
• More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2021 ."

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What Is the Corporate Valuation Model?

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Sources of Information for SWOT Analysis

How to determine the value of publicly held shares of a company, six of the elements of a company's financial report.

• How Does Return on Equity Relate to Return on Sales and Return on Assets?
• The Value of a Business Based on Cash Flow

The value of your company is an important figure in your financial dealings. You can use valuation to help qualify for loans, to set a price for selling your company and to improve your status in your industry and in the business community. Once you understand the traditional corporate valuation model that many business appraisers use, you can apply the model's principles to your own company.

Assets-in-Place

The corporate valuation model begins with finding the value of assets you already own. This includes equipment, machinery, property, vehicles and any supplies or inventory. "Assets-in-place" are those items that you actually use in your current operations. Think of any item you own whose purpose is to create income and you can readily identify operational assets. Value them by comparing them to similar items companies are selling, or by finding the original purchase price and subtracting any amounts you have depreciated for each asset.

Value of Operations

Your company has a current value based on how it has been performing. To find that value, find your cash flow and multiply it by (1 + your current growth rate). For example, if your cash flow is $200,000 and your growth rate is 5 percent, you multiply 200,000 times 1.05 to get $210,000. Divide that figure by your cost of capital minus the growth rate. So, if capital costs you 12 percent, express this as .12 and subtract .05 to get .07. To finish the calculation, 210,000 divided by .07 is 3,000,000. Your value of operations is $3 million.

Present Value of Growth Opportunities

If you are buying more assets or another company, you can calculate how much more income that purchase will bring you annually. This growth can be added to your company value. Your growth opportunities also include any initiatives you are undertaking, such as an e-commerce effort, global marketing or adding new product lines, to give a few examples. Find the present value of your growth opportunities by using your present value of operations and subtracting earnings divided by cost of capital. In the example we've been using, if your current value of operations is $3,000,000, and earnings on equity are $100,000, with a 12 percent cost of equity, perform this calculation: 3,000,0000 minus (100,000 divided by .12). Your present value of growth opportunities is $2,166,667.

Non-operating Assets

You may have assets that don't contribute to operations. Non-operating assets include investment accounts, bonds, cash that is earning interest and any real estate you own that is not directly used as part of your operation. To determine value, you have to use a snapshot of the cash value at the moment you are doing the calculation. Clearly, this type of asset can fluctuate in value. Nevertheless, if you value non-operating assets at the same time each year, you will have a fair idea of their value and how they contribute to your overall valuation.

Goodwill and Brand Value

If you have a strong brand and a lot of customer loyalty, these intangible assets have value. There is no formula for establishing a dollar amount for intangible assets, but you can add a premium to your company's value based on what similar companies in your industry have done. The basic idea is that your company is worth more because people trust it over your competition. You will have to estimate the value of this, but if you were to sell your company, the market would accept an educated guess about the value of intangible assets.

Managerial Entrenchment

If management personnel are confident that they can't be replaced and that they won't be judged by performance, you may have to discount your company value because anyone buying your company might meet with resistance regarding price or even regarding whether to sell at all. In addition, those appraising the company may wonder if the business can innovate and grow if management has little incentive to do so. Such entrenchment is viewed as a negative when valuing a company, so take it seriously. A track record of turning down buyout offers and avoiding innovation can cause your overall valuation to decline.

• Auburn University: Corporate Value
• Finance Train: Present Value of Growth Opportunities (PVGO)
• B2B International: Measuring Brand Value – How Much Are Brands Worth?

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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Traditional Business V/S Digital Business and Types of Business Models Used

This post discusses the differences between traditional businesses and digital businesses. It also talks about the types of business models that come under these two forms of businesses.

Managing a business is both challenging and interesting. It’s not like your 9-5 government job where one reaches the office at or before a particular time, does some mundane tasks, and then wraps up for the day at a fixed time. With business, everything takes a different turn. Inherent risks and the constant need to pacify customer requirements float in the business owners’ minds.

A traditional business setup has a physical presence, and it serves people locally by providing services or products through brick-and-mortar stores. In case of a digital business setup, people sitting in any corner of the world can scroll through the web and avail the company's services and products.

What is Traditional Business? Types Of Traditional Business Models What is Digital Business? Types Of Digital Business Models Traditional Business V/S Digital Business

What is Traditional Business?

Organizations such as restaurants, agencies, and anything resembling an office-setup fall in this category. Traditional business-oriented organizations usually sell products or services through stores.

A traditional business serve s customers in exchange for monetary compensation. It works on CAPEX and OPEX. While such organizations focus on profit generation, a few of them—non-profit organizations—work for customers without expecting profits.

Types Of Traditional Business Models

Various types of business models used in traditional business are:

Manufacturer

The manufacturer business model utilizes raw materials to create products that are then sold in the market. This type of business model involves the assembly of pre-manufactured items. The products are either directly sold to the customers in what’s known as B2C model (business to customer) , or to another business unit in the form of B2B model (business to business) . Automobile manufacturers are an example of B2C model, and wholesalers follow the B2B model.

Distributor

A company in the distributor business model buys products directly from the manufacturer . The company then sells the procured products to consumers or retailers.

A company following the retailer business model purchases products from the wholesaler/distributor. It then sells the inventory to the public. Brick-and-mortar stores fall in this category.

In this setup, the company buys the franchise of a very successful brand and promotes the brand’s services/products to the general public. The franchise segment is a popular way to build awareness across geographies.

What is Digital Business?

Digital business is the modern form of business, a significant deviation from the established norm. This model leverages technology for value creation & addition, thereby giving an entirely different customer experience.

The umbrella term includes both digital-only brands as well as traditional businesses that use modern-day innovations. Prominent examples of digital businesses are Uber, the cab-owning service which allows the user to book cabs online, Disney+Hotstar , and Netflix (video streaming service).

Types Of Digital Business Models

Types of the business model used in digital business are:

Small businesses fall in this category. With a small presence on digital platforms, such ventures rely on traditional marketing methods like direct mail and print advertising.

Intermediate

A level where small businesses employ tools like websites with basic functionality; these sites don't have e-commerce or mobile rendering capabilities. Other factors like listing in online directories and third-party marketplaces play a major part here.

Advanced websites with mobile app versions or e-commerce abilities are used by digital businesses in this category. The reliance on Social media engagement is quite significant. Video conferencing, SAAS apps, etc. are part of the toolkit.

This model is the epitome of digital business. Such ventures have high social media visibility, have little or no physical presence (as in brick-and-mortar stores), and engage with customers extensively through the internet.

Traditional Business V/S Digital Business

There are various differences between traditional business and digital business which are listed below:

• The traditional business model requires more capital than its digital counterpart. The former needs place, furniture, transport, staff, and other utilities. Digital businesses are cost-effective in this aspect.
• A business unit following the digital approach is convenient for customers in terms of the flexibility offered in the variety and cost of products (consider Amazon's extensive product catalog). In the traditional setup, rigidity is a major issue. As a result, consumers are now inclined towards shopping online.
• The digital business model is yet to achieve perfection when it comes to real-time customer experience . For example, you can’t try a mobile phone before purchasing it from Amazon. You rely on customer reviews and the specifications listed on the website. This obstacle is overcome in the traditional business model.
• Online businesses tend to have a larger digital market spend than their old-school counterparts. Traditional businesses diversify marketing strategies to attract customers from both local areas and online demographics. But their reach is relatively restricted to digital businesses.
• Digital businesses work 24/7 and overcome both geographical and timing barriers. You can carry out online purchases in the middle of the night from anywhere in the world.
• Organizations based on the traditional business model have restrictions on when and where they function. Timings are rigid and customer service isn’t flexible either. There are exceptions where few traditional business operates 24/7, but those are limited in numbers and function in select locations only.

What is the difference between traditional business and digital business?

A traditional business setup has a physical presence, and it serves people locally by providing services or products through brick-and-mortar stores. In the case of a digital business setup, people sitting in any corner of the world can scroll through the web and avail the company's services and products.

Why is online business better than traditional business?

Digital businesses work 24/7 and overcome both geographical and timing barriers. You can carry out online purchases in the middle of the night from anywhere in the world. Traditional business has restrictions on when and where they function.

What is traditional business?

What are traditional business models.

Types of Traditional Business Models:

• Manufacturer: The manufacturer business model utilizes raw materials to create products that are then sold in the market. This type of business model involves the assembly of pre-manufactured items.
• Distributor: A company in the distributor business model buys products directly from the manufacturer.
• Retailer: A company following the retailer business model purchases products from the wholesaler/distributor. It then sells the inventory to the public. Brick-and-mortar stores fall in this category.
• Franchise: In this setup, the company buys the franchise of a very successful brand and promotes the brand’s services/products to the general public. The franchise segment is a popular way to build awareness across geographies.

What is the difference between traditional and non-traditional business?

The major difference between traditional and non-traditional business are:

Traditional

Standalone stores, retail spaces in malls, and any other type of place that houses a usual location for a given franchise fall under the category of traditional businesses.

Non-Traditional

Non-traditional businesses conduct most of their operations over the internet. They might have a few physical stores but these are generally for resolving customer issues and function as a point-of-contact.

What are the types of ECommerce Business models?

Four Traditional Types of Ecommerce Business Models are:

• B2C – Business to consumer
• B2B – Business to business
• C2B – Consumer to business
• C2C – Consumer to consumer

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How to Value a Company: 6 Methods and Examples

• 21 Apr 2017

Determining the fair market value of a company can be a complex task. There are many factors to consider, but it's an important financial skill businesses leaders need to succeed. So, how do finance professionals evaluate assets to identify one number?

Below is an exploration of some common financial terms and methods used to value businesses, and why some companies might be valued highly, despite being relatively small.

What Is Company Valuation?

Company valuation, also known as business valuation, is the process of assessing the total economic value of a business and its assets. During this process, all aspects of a business are evaluated to determine the current worth of an organization or department. The valuation process takes place for a variety of reasons, such as determining sale value and tax reporting.

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How to Valuate a Business

One way to calculate a business’s valuation is to subtract liabilities from assets. However, this simple method doesn’t always provide the full picture of a company’s value. This is why several other methods exist.

Here’s a look at six business valuation methods that provide insight into a company’s financial standing, including book value, discounted cash flow analysis, market capitalization, enterprise value, earnings, and the present value of a growing perpetuity formula.

1. Book Value

One of the most straightforward methods of valuing a company is to calculate its book value using information from its balance sheet . Due to the simplicity of this method, however, it’s notably unreliable.

To calculate book value, start by subtracting the company’s liabilities from its assets to determine owners’ equity. Then exclude any intangible assets. The figure you’re left with represents the value of any tangible assets the company owns.

As Harvard Business School Professor Mihir Desai mentions in the online course Leading with Finance , balance sheet figures can’t be equated with value due to historical cost accounting and the principle of conservatism. Relying on basic accounting metrics doesn't paint an accurate picture of a business’s true value.

2. Discounted Cash Flows

Another method of valuing a company is with discounted cash flows. This technique is highlighted in the Leading with Finance as the gold standard of valuation.

Discounted cash flow analysis is the process of estimating the value of a company or investment based on the money, or cash flows, it’s expected to generate in the future . Discounted cash flow analysis calculates the present value of future cash flows based on the discount rate and time period of analysis.

Discounted Cash Flow =

Terminal Cash Flow / (1 + Cost of Capital) # of Years in the Future

The benefit of discounted cash flow analysis is that it reflects a company’s ability to generate liquid assets. However, the challenge of this type of valuation is that its accuracy relies on the terminal value, which can vary depending on the assumptions you make about future growth and discount rates.

3. Market Capitalization

Market capitalization is one of the simplest measures of a publicly traded company's value. It’s calculated by multiplying the total number of shares by the current share price .

Market Capitalization = Share Price x Total Number of Shares

One of the shortcomings of market capitalization is that it only accounts for the value of equity, while most companies are financed by a combination of debt and equity.

In this case, debt represents investments by banks or bond investors in the future of the company; these liabilities are paid back with interest over time. Equity represents shareholders who own stock in the company and hold a claim to future profits.

Let's take a look at enterprise values—a more accurate measure of company value that takes these differing capital structures into account.

4. Enterprise Value

The enterprise value is calculated by combining a company's debt and equity and then subtracting the amount of cash not used to fund business operations.

Enterprise Value = Debt + Equity - Cash

To illustrate this, let’s take a look at three well-known car manufacturers: Tesla, Ford, and General Motors (GM).

In 2016, Tesla had a market capitalization of $50.5 billion. On top of that, its balance sheet showed liabilities of $17.5 billion. The company also had around $3.5 billion in cash in its accounts, giving Tesla an enterprise value of approximately $64.5 billion.

Ford had a market capitalization of $44.8 billion, outstanding liabilities of $208.7 billion, and a cash balance of $15.9 billion, leaving an enterprise value of approximately $237.6 billion.

Lastly, GM had a market capitalization of $51 billion, balance sheet liabilities of $177.8 billion, and a cash balance of $13 billion, leaving an enterprise value of approximately $215.8 billion.

While Tesla's market capitalization is higher than both Ford and GM, Tesla is also financed more from equity. In fact, 74 percent of Tesla’s assets have been financed with equity, while Ford and GM have capital structures that rely much more on debt. Nearly 18 percent of Ford's assets are financed with equity, and 22.3 percent of GM's.

When examining earnings, financial analysts don't like to look at the raw net income profitability of a company. It’s often manipulated in a lot of ways by the conventions of accounting, and some can even distort the true picture.

To start with, the tax policies of a country seem like a distraction from the actual success of a company. They can vary across countries or time, even if nothing actually changes in the company’s operational capabilities. Second, net income subtracts interest payments to debt holders, which can make organizations look more or less successful based solely on their capital structures. Given these considerations, both are added back to arrive at EBIT (Earnings Before Interest and Taxes), or “ operating earnings .”

In normal accounting, if a company purchases equipment or a building, it doesn't record that transaction all at once. The business instead charges itself an expense called depreciation over time. Amortization is the same thing as depreciation but for things like patents and intellectual property. In both instances, no actual money is spent on the expense.

In some ways, depreciation and amortization can make the earnings of a rapidly growing company look worse than a declining one. Behemoth brands, like Amazon and Tesla, are more susceptible to this distortion since they own several warehouses and factories that depreciate in value over time.

With an understanding of how to arrive at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for each company, it’s easier to explore ratios.

According to the Capital IQ database , Tesla had an Enterprise Value to EBITDA ratio of 36x. Ford's is 15x, and GM's is 6x. But what do these ratios mean?

6. Present Value of a Growing Perpetuity Formula

One way to think about these ratios is as part of the growing perpetuity equation. A growing perpetuity is a kind of financial instrument that pays out a certain amount of money each year—which also grows annually. Imagine a stipend for retirement that needs to grow every year to match inflation. The growing perpetuity equation enables you to find out today’s value for that sort of financial instrument.

The value of a growing perpetuity is calculated by dividing cash flow by the cost of capital minus the growth rate.

Value of a Growing Perpetuity = Cash Flow / (Cost of Capital - Growth Rate)

So, if someone planning to retire wanted to receive $30,000 annually, forever, with a discount rate of 10 percent and an annual growth rate of two percent to cover expected inflation, they would need $375,000—the present value of that arrangement.

What does this have to do with companies? Imagine the EBITDA of a company as a growing perpetuity paid out every year to the organization’s capital holders. If a company can be thought of as a stream of cash flows that grow annually, and you know the discount rate (which is that company’s cost of capital), you can use this equation to quickly determine the company’s enterprise value.

To do this, you’ll need some algebra to convert your ratios. For example, if you take Tesla with an enterprise to EBITDA ratio of 36x, that means the enterprise value of Tesla is 36 times higher than its EBITDA.

If you look at the growing perpetuity formula and use EBITDA as the cash flow and enterprise value as what you’re trying to solve for in this equation, then you know that whatever you’re dividing EBITDA by is going to give you an answer that is 36 times the numerator.

To find the enterprise value to EBITDA ratio, use this formula: enterprise value equals EBITDA divided by one over ratio. Plug in the enterprise value and EBITDA values to solve for the ratio.

Enterprise Value = EBITDA / (1 / Ratio)

In other words, the denominator needs to be one thirty-sixth, or 2.8 percent. If you repeat this example with Ford, you would find a denominator of one-fifteenth, or 6.7 percent. For GM, it would be one-sixth, or 16.7 percent.

Plugging it back into the original equation, the percentage is equal to the cost of capital. You could then imagine that Tesla might have a cost of capital of 20 percent and a growth rate of 17.2 percent.

The ratio doesn't tell you exactly, but one thing it does highlight is that the market believes Tesla's future growth rate will be close to its cost of capital. Tesla's first quarter sales were 69 percent higher than this time last year.

The Power of Growth

In finance, growth is powerful. It explains why a smaller company like Tesla carries a high enterprise value. The market has taken notice that, while Tesla is much smaller today than Ford or GM in total enterprise value and revenues, that may not always be the case.

If you want to advance your understanding of financial concepts like company valuation, explore our six-week online course Leading with Finance and other finance and accounting courses to discover how you can develop the intuition to make better financial decisions.

This post was updated on April 22, 2022. It was originally published on April 21, 2017.

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What Is a Business Model?

• Andrea Ovans

A history, from Drucker to Christensen.

A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition. Many people believe Peter Drucker defined the term in a 1994 article as “assumptions about what a company gets paid for,” but that article never mentions the term business model. Instead, Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy. Businesses make assumptions about who their customers and competitors are, as well as about technology and their own strengths and weaknesses. Joan Magretta carries the idea of assumptions into her focus on business modeling, which encompasses the activities associated with both making and selling something. Alex Osterwalder also builds on Drucker’s concept of assumptions in his “business model canvas,” a way of organizing assumptions so that you can compare business models. Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. Rita McGrath offers that your business model is failing when innovations yield smaller and smaller improvements. You can innovate a new model by altering the mix of products and services, postponing decisions, changing the people who make the decisions, or changing incentives in the value chain. Finally, Mark Johnson provides a list of 19 types of business models and the organizations that use them.

In The New, New Thing , Michael Lewis refers to the phrase business model as “a term of art.” And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.

That’s less surprising than it seems, because how people define the term really depends on how they’re using it.

Lewis, for example, offers up the simplest of definitions — “All it really meant was how you planned to make money” — to make a simple point about the dot.com bubble, obvious now, but fairly prescient when he was writing at its height, in the fall of 1999. The term, he says dismissively, was “central to the Internet boom; it glorified all manner of half-baked plans…The ‘business model’ for Microsoft, for instance, was to sell software for 120 bucks a pop that cost fifty cents to manufacture …The business model of most Internet companies was to attract huge crowds of people to a Web site, and then sell others the chance to advertise products to the crowds. It was still not clear that the model made sense.” Well, maybe not then.

A look through HBR’s archives shows the many ways business thinkers use the concept and how that can skew the definitions. Lewis himself echoes many people’s impression of how Peter Drucker defined the term — “assumptions about what a company gets paid for” — which is part of Drucker’s “theory of the business.”

That’s a concept Drucker introduced in a 1994 HBR article that in fact never mentions the term business model. Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy . In addition to what a company is paid for, “these assumptions are about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses.”

Drucker is more interested in the assumptions than the money here because he’s introduced the theory of the business concept to explain how smart companies fail to keep up with changing market conditions by failing to make those assumptions explicit.

Citing as a sterling example one of the most strategically nimble companies of all time — IBM — he explains that sooner or later, some assumption you have about what’s critical to your company will turn out to be no longer true. In IBM’s case, having made the shift from tabulating machine company to hardware leaser to a vendor of mainframe, minicomputer, and even PC hardware, Big Blue finally runs adrift on its assumption that it’s essentially in the hardware business, Drucker says (though subsequent history shows that IBM manages eventually to free itself even of that assumption and make money through services for quite some time).

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How to Design a Winning Business Model

Joan Magretta, too, cites Drucker when she defines what a business model is in “ Why Business Models Matter ,” partly as a corrective to Lewis. Writing in 2002, the depths of the dot.com bust, she says that business models are “at heart, stories — stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”

Magretta, like Drucker, is focused more on the assumptions than on the money, pointing out that the term business model first came into widespread use with the advent of the personal computer and the spreadsheet, which let various components be tested and, well, modeled. Before that, successful business models “were created more by accident than by design or foresight, and became clear only after the fact. By enabling companies to tie their marketplace insights much more tightly to the resulting economics — to link their assumptions about how people would behave to the numbers of a pro forma P&L — spreadsheets made it possible to model businesses before they were launched.”

Since her focus is on business modeling, she finds it useful to further define a business model in terms of the value chain. A business model, she says, has two parts: “Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on. Part two includes all the activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product, or delivering the service. A new business model may turn on designing a new product for an unmet need or on a process innovation. That is it may be new in either end.”

Firmly in the “a business model is really a set of assumptions or hypotheses” camp is Alex Osterwalder, who has developed what is arguably the most comprehensive template on which to construct those hypotheses. His nine-part “ business model canvas ” is essentially an organized way to lay out your assumptions about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams — to see if you’ve missed anything important and to compare your model to others.

Once you begin to compare one model with another, you’re entering the realms of strategy, with which business models are often confused. In “ Why Business Models Matter ,” Magretta goes back to first principles to make a simple and useful distinction, pointing out that a business model is a description of how your business runs, but a competitive strategy explains how you will do better than your rivals. That could be by offering a better business model — but it can also be by offering the same business model to a different market.

Introducing a better business model into an existing market is the definition of a disruptive innovation . To help strategists understand how that works, Clay Christensen presented a particular take on the matter in “ In Reinventing Your Business Model ” designed to make it easier to work out how a new entrant’s business model might disrupt yours. This approach begins by focusing on the customer value proposition — what Christensen calls the customer’s “job-to-be-done.” It then identifies those aspects of the profit formula, the processes, and the resources that make the rival offering not only better, but harder to copy or respond to — a different distribution system, perhaps (the iTunes store); or faster inventory turns (Kmart); or maybe a different manufacturing approach (steel minimills).

Many writers have suggested signs that could indicate that your current business model is running out of gas. The first symptom, Rita McGrath says in “ When Your Business Model is In Trouble ,” is when innovations to your current offerings create smaller and smaller improvements (and Christensen would agree). You should also be worried, she says, when your own people have trouble thinking up new improvements at all or your customers are increasingly finding new alternatives.

Knowing you need one and creating one are, of course, two vastly different things. Any number of articles focus more specifically on ways managers can get beyond their current business model to conceive of a new one. In “ Four Paths to Business Model Innovation ,” Karan Giotra and Serguei Netessine look at ways to think about creating a new model by altering your current business model in four broad categories: by changing the mix of products or services, postponing decisions, changing the people who make the decisions, and changing incentives in the value chain.

In “ How to Design a Winning Business Model ,” Ramon Cassadesus-Masanell and Joan Ricart focus on the choices managers must make when determining the processes needed to deliver the offering, dividing them broadly into policy choices (such as using union or nonunion workers; locating plants in rural areas, encouraging employees to fly coach class), asset choices (manufacturing plants, satellite communication systems); and governance choices (who has the rights to make the other two categories of decisions).

If all of this has left your head swimming, then Mark Johnson, who went on in his book Seizing the White Space to fill in the details of the idea presented in “Reinventing Your Business Model,” offers up perhaps the most useful starting point — this list of analogies, adapted from that book:

Can’t Think of a New Business Model?

Try adapting one of these basic forms.

Source: Seizing the White Space, by Mark Johnson

• AO Andrea Ovans is a former senior editor at Harvard Business Review.

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Gartner Research

The gartner business value model: a framework for measuring business performance, providing cios the ability to simulate the impact of it investments and services on financial results.

Analysts:  Rajesh Kandaswamy, David Furlonger

This research serves as a structured framework and definition of nonaccounting metrics that can be applied generically to help organizations identify how their business activities will impact financial performance. 

We believe that this standardization will enhance IT-to-business communication by allowing greater precision and meaning in addressing increasingly complex business value creation issues. The Business Value Model is a set of precisely defined performance metrics and is a useful tool that extends, not replaces, traditional accounting metrics in determining the real drivers of business value and in closing the measurement gap.

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How to Value a Startup — 10 Real-World Valuation Methods

Startup valuation is more art than science, let’s explore both. here are 10 tried & true methods for figuring out how to value a startup..

March 16th, 2022    |    By: Emma McGowan     |    Tags: Exit Strategy , Valuation , Planning

The question of startup valuation is one that founders struggle with, especially in the early stages. If you’re a pre-profitable startup company — or even pre-cashflow — how can you figure out what your company is worth? Let's dive in to different valuation methods for early stage startups.

One way is to think about “value” as something that exists beyond monetary terms (especially for pre revenue startups).

“Valuation is both art and science,” Lili Balfour of Atelier Advisors says. “The science is the easy part — researching valuations for comparable companies and constructing a revenue or EBITDA multiple. The art is more subjective. How strong is the team? How probable are the leads in the pipeline? How innovative is the technology?”

Those are the more nebulous aspects of “value.” Another aspect is the valuation of similar companies that are already out in the market.

“Startups, by definition don’t have a long track record of revenue, earnings or cash flow (if any) so much of the valuation exercise is conducted by looking at the marketplace of comparable companies and understanding how the industry for a type of startup values the companies within it,” Georgene Huang , CEO and Cofounder of Fairygodboss , says.

Those are the first steps of figuring out how to value a startup: Think of value beyond monetary terms and then think explicitly about the monetary value of similar companies. But, like so many things in the startup world, there’s more than one way to figure out startup valuation for pre revenue startups or early stage startups.

Check out the startup valuation methods these ten founders and investors recommend for figuring out how much your company is likely to be worth.

1. Standard Earnings Multiple Method

“The method that I prefer for startup valuation is a standard earnings multiple, with additional consideration being attributed to recurring revenue models. This valuation method provides the greatest insight into free cash flow and how that metric will drive incremental value to a purchaser.

In my market, the multiple typically ranges between 5 to 8x the past three years average profit (yearly) but in SAAS businesses, ranges may fall in the 8 to 12x range.

Besides the standard profit model, other factors to consider are previous debt incurred or funding rounds as well as the intellectual capital of the product or service. In situations which strategic buyers are present, and a company has some sort of patent or proprietary technology, startup company valuations can grow tremendously without profit being on the books.”

– Craig Smith , Founder & CEO, Trinity Insight

Additional notes/resources:

• How To Value Your Startup Using Comparables by Nathan Hurst
• CBInsights , Crunchbase , and Pitchbook are great resources

2. Human Capital Plus Market Value Method

“Figuring out startup valuation is no easy task for an investor because most of them have very low intangible/intangible assets ratio (ex venture capital firms). In other words, a potential startup investor should calculate a value of ideas, know-hows, and human potential of the team.

There are two ways I value the projects: Firstly, I can get to know the team and their expertise, I assess the people who develop the project (when you work in a common sector of economy with those who you assess, e.g. IT, it could be a pretty simple task). Secondly, I can perform a purely mathematical valuation based on the obtainable market volume. When an investor knows at least some rough estimations, he can easily extrapolate a startup’s potential, and thus, future profits hidden in today’s valuation.”

– Andrew Zimine , CEO of Exscudo

3. 5x Your Raise Method

“In Rare Carat’s conversations with VCs, we were surprised to find that it was not so much the ‘value’ of our company from metrics like monthly revenue — but more about the ‘stake’ the investor is receiving for their money — with a rule of thumb that investors will desire something in the neighborhood of 20 to 25 percent. So to oversimplify, we’ve found the value of a startup is roughly five times the amount you are raising.

The temptation here is to maximize your valuation, but this creates a new problem for you in the future when you go to raise your next round (bad things happen to founders in down rounds). So shoot for a strong and reasonable valuation, but don’t shoot yourself in the foot.”

– Ajay Anand , CEO and Founder, Rare Carat

4. Thinking About The Exit Method

“As a founder, I want to build a big operational business and have enough stake when it’s sold. My method is control based: What valuation leaves me enough stake on the exit. I have seen enough situations when the business needed to raise, but due to wrong evaluations on early rounds and subsequent terms on the late rounds, founders did not have an incentive to prove startup worth or grow the company further.

I build a model cap table with the main stages my business should go through (depends on the business model). That gives me a tool for sensitivity analysis on what valuation and other terms are acceptable on early rounds of pre revenue startups to have a good exit. Of course, I assume that on Series A and later the valuation will be based on revenue growth or EBITDA.”

– Konstantin Savenkov , CEO Intento, Inc.

• For the exit method, also called liquidation analysis or waterfall analysis, read more here.
• Here’s a template to model it out .
• Which reminds us, you probably want to put together your cap-table in order to start to understand exit scenarios. Here’s a great free resource .

5. Discounted Cash Flow Method

“As a Certified Business Appraiser with 20 years of experience, I have done many startup valuations for in many different industries (IT, bio-tech, consumer products, etc.). My preferred valuation method is the Discounted Cash Flow Method. The key to using this valuation method correctly for valuing startups is:

1. Estimating the total market for the startup company’s product or services and its expected revenue growth.

2. Forecasting market share acquisition across a timeline.

3. Forecasting cash flow by identifying the startup’s fixed and variable costs and future working capital and capital expenditures needs.

With all of the forecasts, we can’t just take into account the most optimistic/pie-in-the-sky outlook. We need to take into account that the majority of startups fail completely — and a significant amount of the non-failures just squeak by. We then apply a discount rate to these forecast that accounts for the risk inherent in them. We determine this rate according to the subject’s lifecycle stage (seed/startup/early/expansion/later). All of these numbers should be based on empirical data sources that are as trustworthy as possible.

Constructing a valuation in this way helps the founder have meaningful valuation conversations with investors and steers the conversation toward the real assumptions that drive value. Without this type of valuation, everybody is just shooting from the hip when talking about how to value a startup.”

– Chaim Borevitz , CBA, CEPA, MBA, Managing Director, Abrams Valuation Group, Inc.

• Investors will often combine a DCF with another method to understand the valuation. One variation of this methodology is the Chicago Method which combines both a DCF and comparable multiples.
• Also see: How to value your deal like an investor

6. Comparison Valuation Method

“Anchoring valuation in recent and comparable M&A deals or venture investments is often the most common way both founders and investors look at startup valuation, in my experience. Given the lack of much alternative, I think this is a fair way of looking at startup valuation.

Of course, the downside of this valuation approach is that a startup’s valuation can hugely change depending on the market conditions, so be sure you know which valuation method is right for your startup company. For example, a certain type of startup might be in vogue versus another kind of startup, which will make a lot of startup valuation subject to investor whims and trends. However, this broader phenomenon is not unique to startups and exists in all financial markets.”

– Georgene Huang , CEO & Cofounder, Fairygodboss

• Similar the multiples method. Check out those resources and don’t forget to leverage online databases through the library or local university. Here’s more info on comparables .

7. Customer-Based Corporate Valuation Method

“I would recommend using an emerging methodology called ‘customer-based corporate valuation.’ It is more diagnostic and accurate because it infers and incorporates the most important determinants of corporate valuation — customer acquisition, retention, and monetization — directly into the valuation model, while traditional models do not.

Customer-based corporate valuation values a business by using sophisticated predictive customer analytics to uncover how well a company is acquiring new customers, and retaining and monetizing existing customers. It then plugs this information into a standard discounted cash flow valuation model to come up with an estimate of the overall valuation of a firm.”

– Daniel McCarthy , Co-founder and Chief Statistician of predictive analytics firm Zodiac.

8. Combo Platter Method

“Being in the Boston area, there is a bend towards more conservative financing vehicles (e.g. equity over convertible debt ) as well as more conservative valuations. Having started our company while at Babson College, we first did our financial models by the book, but were quickly told that valuations at our stage were not particularly tied to our financial assumptions, but rather things in the real world. The key metrics investors were looking for were tied to us ‘de-risking’ the business. Did we have a product? Were we the right team? Was this the right time and is the vision big enough?

We answered these and then backed them up with real-world valuation numbers from three sources. First and most reliable, was looking at Angel List for past ‘enterprise’ ‘AI’ ‘Boston’ deals and we came up with a best/moderate/worst case for a valuation. This was balanced with the Berkus method and the Risk Factor Summation method, which helped us refine the right valuation range. From there we were able to prove startup worth and negotiate with our lead investors knowing our zone of possible agreement based on real-world factors and ended up raising a $1M seed round at an agreeable valuation.”

– Rich Palmer , co-founder of Gravyty

• More info on the Berkus method with images

9. Gross Profit x Competitor’s Multiple Method

“The valuation method I prefer for valuing startups is gross profit multiplied by a multiple based on industry, offering, and revenue growth. Gross profit is a great indication of growth, company health, and market penetration while still properly valuing businesses that aren’t profit optimized because they consistently invest back into the business.

For example, we valued our business by looking for public companies that are most similar to our business. We then used the same valuation formula they used but attributed to our gross profit. The formula we used:

MonetizeMore Gross Profit (Last 12 months) x 5.91 (Competitor’s Multiple) = Current Valuation

When looking for similar companies, they must have a very similar business model, industry and customer base. In our case, we chose a competitor with a similar product.”

– Kean Graham , CEO of MonetizeMore

• How do do the Gross Revenue Valuation Method via AVC .
• Here’s an example spreadsheet .

10. Best For Me Method

“There are a variety of valuation methods to value a business including: book value, multiple of revenue, multiple of earnings, and more. As a buyer or seller, you will obviously want to select the valuation method that favors you most — assuming that the person on the other side of the transaction is going to use the method that favors you least.

Typically, however, each industry has a standard it favors that standard will likely govern the end value. A local retail business will probably sell for 1-2 times annual earnings plus assets/property that convey with the sale. A tech startup with high growth potential is likely going to be a multiple of future earnings based on the rate of growth it currently exhibits.”

– John B. Dinsmore , Ph.D., Assistant Professor, Marketing, Raj Soin College of Business at Wright State University

Bonus Valuation Method

As mentioned briefly above, there are multiple valuation methods to value a startup, and one not mentioned (but worth noting since this is arguably the most common startup valuation approach) is the Venture Capital Method that was developed in 1987 by Bill Sahlman .

If working with a venture capital firm, you should know how they calculate valuations. Venture capital firms use this valuation method to establish an understanding of the value of a startup using this basic framework . In addition to the venture capital method, a VC Term Sheet is used to define the specific conditions of venture capital investments between an early-stage startup company and the venture firm itself.

So how should you Calculate your startup’s valuation?

As you can see, different people have different valuation methods for figuring out startup valuation. However, the differences are pretty small — a slightly different calculation here; a shift in perspective there.

But many of them take both the human and the monetary elements into consideration when figuring out the “value” of a startup. Nathan Lustig , Managing Partner at Magma Partners , takes that idea to the next level.

“Obviously valuation matters, but if you find the right partner that you think will actually help you in areas other than just money, think twice about just taking the highest offer,” Lustig says. “Also, read the fine print. Many term sheets include other provisions that make the same valuation offer extremely different.”

So, remember: You need to make both human and monetary considerations. But make sure you never forget the human, even when you’re spending hours and hours on cap tables and calculations to value a startup.

Because it’s the people who really make your startup what it is.

Final notes:

Startup valuations often require information from other companies that are similar to yours in order to determine the true value of a startup. Investors (at venture capital firms and beyond) will look at competitors and other companies in the same industry to best understand how your company and business model fits into this landscape.

They will look at financials, funding rounds, how much those companies raised, pre revenue valuations, or post revenue valuations. Valuations don't necessarily define [founder success](https://www.startups.com/library/expert-advice/what-does-founder-success-feel-like) — there is a lot more to it than that. You actually have access to those same resources to find that information at your fingertips via Public Library Databases.

If you don’t have a library account, you seriously should go create one. Public libraries have a whole repository of research databases at your disposal with public/private company information. Same with university libraries too.

Oftentimes, universities will have even more databases with better data since they have larger budgets. Either way, go create a library account or go find your old university email and create those accounts.

You will have full access to this trove of valuable knowledge.

• For example, San Francisco Public Library has a whole slew of research sources that may have market data, market reports, and much more. https://sfpl.org/index.php?pg=2000028601&tab=subject&cid=1
• Another example, the Columbus Public Library (Ohio) has a whole bunch too – http://www.columbuslibrary.org/research
• Try Google searching for your city + public library + research database. Examples (“Columbus public library research” or “San Francisco public Library research database”).

Some of our favorite databases that you may find within the list of the library’s research databases include:

• Mergent Intellect

These resources contain industry research reports, public/private company financials, funding rounds, and more. If you’re searching for evidence on how to value a startup, these free resources are a great place to start.

Also worth a read:

• Startup Valuations: What’s My Seed Stage Startup Worth?
• Your First Order of Business? Plan a Startup Exit Strategy!
• Shutting Down Your Startup: The Exit No One Talks About
• Managing Insane Growth : Master class by Matt Mullenweg
• Zero to IPO : Master class by George Northup

About the Author

Emma mcgowan.

Emma McGowan is a full time blogger and digital nomad has been writing about startups, living with startup people, and basically breathing startups for the past five years. Emma is a regular contributor to Bustle, Startups.co, KillerStartups, and MiKandi. Her byline can also be found on Mashable, The Daily Dot's The Kernel, Mic, The Bold Italic, as well as a number of startup blogs.

Follow her on Twitter @ MissEmmaMcG .

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How to Value a Fintech Startup

Compared to traditional financial services businesses, fintech startups require different valuation approaches. This article explores these differences and the best practices to apply when appraising a fintech investment.

By Nirvikar Jain

Nirvikar has helped raise $20+ billion of capital and built lines of business as an experienced CEO, banker, and strategist.

Previously At

Fintech is a popular contemporary buzzword and many of its products touch our lives every day. A fintech simply refers to a company that operates in the financial services sector and leverages the power of technology to simplify, automate, and improve the delivery of financial services to end customers. Further, they can be classified into various sub-sectors including payments, investment management, crowdfunding, lending and borrowing, insurance, cross border remittances, and so on based on the specific segment that they are trying to service.

There were over 12,000 fintechs operating globally as of January 2019  ( Crunchbase Dec 2018), who since 2013 have amassed total funding resources of well in excess of US$100 billion. In terms of the number of fintech startups, the US is the most active country, with India and the UK following.   According to KPMG , global investment activity in fintechs exceeded $30 billion across 450 deals that took place in the first half of 2018 alone.

Company Valuation Approaches: Starting at the Top

The area that I would like to focus on with fintech is how its startups are valued. This interests me due to the following points:

• Why are some of these companies valued so highly, even higher than existing brick and mortar banks, asset management companies, or insurance companies which have been in existence for decades?
• What makes these startups reach such high valuations in such a short span of time? Are these valuations real or imaginary?
• Is there an underlying logic or are these just based on sentiment and market hype?

These are some of the issues that I am going to try and address in this article.

First, let me highlight some of the traditional valuation models that are conventionally used while valuing companies. These methods include:

• Discounted cash flow ( DCF): Traditional model that discounts future cash at the average cost of capital to arrive at the present value of enterprise/equity.
• Multiple of revenue or book value: Such models use a multiple of either revenue or book value to arrive at the value of the company
• Replacement cost: If the business being acquired has assets that are hard to replace or will take time and money to build, one can use the replacement value of underlying assets as a benchmark for valuing the company
• Price-to-earnings (PE) ratio comparable: PE multiples of future earnings per share (EPS) is another common method of valuing companies.
• Strategic/competitive value: A company may bid for another competitor that could potentially become a threat to its existence (i.e. Facebook’s takeover of WhatsApp) and put its business model in danger.

Most valuation exercises use the multiple method to arrive at the valuation of a company and then use different approaches to arrive at ranged estimates, before choosing a number that matches their overall strategic, business, competitive, and return requirements. One thing to note is that the above approaches are typically useful for mature, stable businesses with relatively predictable cash flows and established business models. Whichever approach is used, they are all the same in just trying to estimate an outflow and future expected cash flows with an expected range of IRR.

However, when one looks at the current crop of fintech startups , all of these principles look difficult to apply due to them having completely unpredictable or even negative cash flows, rapidly changing pivoting business models, and in most cases, negligible physical assets.

Valuation of Financial Sector Companies: Traditional Approaches

Now let’s be more specific and look at the valuation of financial sector companies. We can broadly divide the finance industry into various sub-sectors as described below. Each has certain nuances that affect how valuation can be applied to their specific business models.

Modern global banks are typically aggregations of commercial banking, investment banking, wealth management, and advisory services. Focusing on the “traditional bank”, a conventional commercial bank would be valued on parameters like net interest margins , return on assets , EPS , and comparable PE multiples . The first two parameters measure the efficiency of the bank and how efficiently capital is being deployed, while the other two are measuring returns that accrue to shareholders, taking into account the capital structure and the expected growth in earnings.

These approaches primarily take into account the business model of a bank, which basically runs on the spread between deposit and loan rates while managing defaults and maintaining an efficient capital structure.

Mutual Funds

Asset management companies (AMCs) are typically valued as a percentage of AUM that measures an AMC’s ability to generate cash flow based on the total size of funds that it has under its management. This can vary based on the underlying asset class breakup of equity vs fixed income, fee structures and so on.

Another popular measure is to look at market capitalization to AUM, which aims to correlate growth in income potential with the size of the fund, based upon an underlying assumption that AMCs with very high AUMs will not be able to grow income as fast as smaller ones. Other variables to keep in mind while valuing AMCs are:

• Size of the absolute investor base.
• Growing vs stable base of investors.
• Public and regulated vs private and less regulated fee structures.

Insurance Companies

An insurance company would typically be measured on common parameters such as return on equity. A good surrogate for value companies in the public markets would be price to book value, which will reflect the relative valuation of companies across markets. More specifically, some of the relevant factors for valuing insurance companies would be as follow.

Premium growth in the market/company. How fast is the company’s premium income growing? Is it gaining market share? Is the underlying market saturated, or growing? Naturally in a market where insurance is still gaining popularity, the former will likely have a higher potential for growth. Similarly, a new company is likely to have a higher potential to grow as compared to an existing market leader.

Returns consistency. In the case of insurance companies, the payout ratio is not a clearly predictable ratio and can be volatile. Hence one measure that we look at when valuing an insurance company is the consistency of its income to ascertain whether over longer periods it makes consistent returns.

Other comprehensive income (investment income). An insurance company’s income comprises of premium income and investment income earned from its investments, hence OCI is a measure that shows the level of returns from its investment portfolio and forms one of the two key sources of income.

Wealth Management Firms

Conceptually it would appear that WM firms are akin to AMCs and their valuation would be correlated with AUMs, revenue and fee rates. However, their business models are different to pure mutual funds, whos setups are more institutional and standardized. Fund managers do add value, but their investments are more process oriented to support large AUMs driven by standardized and regulated products, with a mass-market sales approach.

In comparison, wealth management firms are more boutique-y and are comparatively less regulated, thus the value that investment managers add is customized to the risk appetite of clients. Also, in the case of sales, relationships are key, with loyal clients investing based on their personal trust, comfort, and relationship with a manager.

Hence, valuing a WM firm is a more detailed and complex task that needs to go into a number of variables. So when valuing a WM, one would have to add the impact of these variables in the valuation model before arriving at a final number.

Understanding the Components of Fintech Valuation

When we come to valuing fintechs, the key differences between conventional businesses and early businesses are mainly in terms of:

• The nature of the problem that it solves (something that wasn’t possible earlier purely due to a breakthrough in technology).
• The ability to rapidly scale up across vast geographies without having the need to set up physical presence and infrastructure.
• The lower cost due to lean structures that no longer needs vast physical IT infrastructure and manpower required by conventional banks.

All these variables give insights into the kind of TAM available, and the subsequent revenues that the fintech can generate.

Below are some of the key variables that go into qualitatively assessing the potential of a new generation fintech, as compared to the traditional financial sector companies that I described above.  Let’s take a detailed look at some of these variables

1. Problems Solved

The foremost variable is the nature of the problem that is getting solved by the company, whether it’s a disruptive solution to a major problem or just an incremental improvement in an existing solution that may not affect the incumbents in a big way.

Using Fintech as an example, Transferwise has grown to a valuation of $1.6bn , due in part to it changing the paradigms of money transfer. If it had followed the status quo of analog brokering based on FX and payment cost, then it’s most likely that it would not be as successful as it is now.

The nature of some businesses makes them easily scalable across large geographies. For example, in the past, banks or mutual fund companies would need an extensive infrastructure of offices, branches, distributors, and agents to be able to reach and service their customers. With new age mobile-enabled fintechs, they are accessible to a client across the legal geography that they operate in and hence can rapidly scale up business.

This allows them to cover a very large TAM within a relatively short time frame hence. For example, digital bank fintech Revolut was launched in 2015 and already has over 3 million customers and is available in over 120 countries. This is definitely larger than the number of countries served by most large international banks which have been in existence for over 100 years.

3. New Use Cases

As fintechs innovate there are new use cases that are enabled with the help of technology, which can potentially expand their market. A simple example could be a drastic reduction in cash balances that customers keep, as fintechs enable low-value P2P payments. This, in turn, is likely to increase idle balances kept with the fintech, as compared to traditional bank accounts. A real example in the fintech world is from wallet startups like Paytm using P2P transactions for enabling low-value payments to settle transactions amongst friends, splitting bills and making payments to small businesses.

4. Lower Distribution and Setup Costs

Typically such startups have business models that leverage the power of networks and are themselves very lean, with much lower infrastructure and setup costs. These costs can reduce as the size of the business grows and customers may benefit from this. For example, Uber doesn’t own any cabs or doesn’t need to have a huge setup for owning, servicing or maintaining cars. In the fintech world, companies like Revolut, Transferwise, and Paypal have a wide footprint across the world without having the need to open offices in each location.

5. Lower Operational Costs

In line with lower infrastructure and manpower, these companies have much lower marginal costs, as the business models are tech-enabled, rather than with transaction-linked high variable cost. This also makes these business models profitability increase exponentially after a certain critical mass that absorbs the fixed cost structure. In the fintech space, one can look at companies like Monzo which have less than one tenth the cost of servicing a retail account as compared to a large traditional bank.

6. Revenue Models

Fintechs work on revenue models that leverage the power of a large number of customers and transactions that network effects enable. It’s important to understand what is the revenue model and how are they going to eventually make money, be it directly from the user or indirectly via advertising or data plays. A model that is just based on generating users without a clear understanding of how it will be monetized may not be successful in the long run.

7. Cross Selling

Due to the typical platform nature of a Fintech offering, it’s also easy to continuously keep adding features and products to the initial MVP.

Cross-selling opportunities become apparent with the benefit of AI-supported insights about consumer behavior and patterns from their use of the tech. This makes it amenable to continuously expand the scope of the offering with relatively small effort. An example of this can be the UK retail bank Monzo which originally started as an online prepaid card service, then a current account and now, lending services.

The Stages of Fintech Development and Investor Profiles

Let’s look at the life cycle of a fintech company and understand each phase.

Starting Out

Once an appropriate founding team is formed, the next step is to convert the idea into a prototype product or service. This prototype is typically a very basic version that translates the vision that the founders have into reality and tries to demonstrate and visualize how the new product will solve the problem in a different way. At this stage the idea is typically funded either by bootstrapping, friends and family, or angel/seed investors and could involve a total initial investment of between $50,000-100,000.

Post founding, the startup uses money raised to build a simple MVP that is a functional and robust working model that can be tested in the market for acceptability. This is an important step in the evolution of the startup and it may require multiple iterations with its functionalities/features to get the product right, using customer feedback loops.

Gaining Traction

Once success is achieved in this, the startup is now ready to raise the next round of money, once again from the angels, seed funds, or VCs. At this stage, the startup has a valid idea and a successful MVP that now needs to be launched in the market to build customer traction. The startup will likely raise the next round of growth capital which could range from $250,000-2 million and can come in multiple tranches based on meeting agreed on milestones.

Full Steam Ahead

Once the company achieves rapid product adaptation and its evident that the customer acceptance is strong and the product will likely scale up, it’s time to now scale up the business, build a robust organizational structure, hire bigger teams and build formal structures. This is the stage at which the company will raise Series A funding, where most early angels/seed funds will likely exit and VCs will increase exposure. Conceptually, the startup has now graduated to a lower risk state and hence there is a switch in the class of investors based on risk-reward expectations.

From here on it’s a stage of rapid growth which will lead to multiple rounds of VC/PE funding and fuel a rapid growth of functionalities, geographies, team sizes and even potential acquisition of competitors or synergistic companies in the entire ecosystem. This will go on until the company’s rapid growth path stabilizes to a more predictable growth path, which will ultimately result in the company launching a public offering (IPO) and an exit for all the remaining investors.

All of this can broadly be summed by the following infographic:

How to Value a Fintech Startup: Valuation Methods

Unlike the traditional financial services business valuation methods described earlier, Fintech, like most startups, has specific approaches that are used for appraising investments.

Scorecard Valuation Model

In scorecard valuations, you first start with estimating an average valuation for similar companies and then asses the target company to this based on a range of parameters. These weightings are applied judgmentally based on the investors’ assessment of relative importance (all of them add up to 100%), with the total rating quotient being applied to the average industry valuation for an indicative mark.

Berkus Method

A quick and easy method to value a startup, based on the expected revenue reaching at least $20 million. That being the case, the startup is evaluated based on five parameters: soundness of idea, founding team, having a product prototype, existing customers and existing sales volume (however small maybe). Based on the attractiveness of each of the above variables, a maximum valuation of $0.5m is applied to each, ensuring that the total pre-money valuation has a maximum cap of $ 2 million.

Risk Factor Summation Method

This method approaches valuation from a much broader perspective and considers a selection of 12 parameters .

Each of the parameters then rated on a 5 point scale (from +2 to -2), multiplied by a factor of $250,000 and then summed up to give the total indicative valuation.

Cost to Duplicate Method

Like in the case of a mature business, if a startup being acquired has the technology or team setup that will take time and money to build, one can use replacement value, or cost-to-duplicate as a benchmark for valuing the company. While this is conceptually similar to the replacement cost method in case of mature companies, the difference here is that the focus is on the broad setup and technology team, rather than physical assets or production capacities.

Venture Capital Method

In this case, the investor typically works backward, by looking at the returns that he is expecting on his investment, based on the exit value estimation of an attractive startup. Let’s say if his return expectations are 15x and he expects the exit valuation of the startup to be $15m, then the present post-money valuation of the startup is calculated by:

Exit valuation/Return Multiple = $15M/15x = $1M

This would be the current post-money valuation of the company, so if $250,000 is being invested for 25% of the company, then the pre-money valuation of the company would come to $750,000.

In addition, there are a few other methods which have been explained above but are primarily used in case of mature companies, I have listed them below for your convenience.

• DCF (Discounted Cash Flow Method)
• Multiple of revenue or profit
• EBITDA Multiples
• The Book Value Method

Art or Science? Depends on the Stage

We can see that at the early stage of the valuation of a fintech is more an ‘art form’ based on vision, market size, promise, dreams, and subjective judgment. As it progresses through its life, it then increasingly becomes more scientific and data based on market share, revenue and cash flows.

Ultimately, it is the potential cash flow that determines the value of a startup, all the above methods can be taken as routes towards calculating this simple concept and the resultant ROI that the investment will generate. These methods are all various surrogates that basically try to calculate the cash generation capability of the business in the long term.

I will continue to explore these concepts in a future article, by applying the above principles to value Transferwise, the UK based cross border money transfer company that has disrupted the cross border money transfer space.

Further Reading on the Toptal Blog:

• Tough Times Don’t Have to Mean Tough Terms: Leveraging Financial and Cap Table Modeling in VC Negotiations

Understanding the basics

What is a fintech company.

Fintech companies are financial services businesses that specifically focus on developing technological innovations to increase their reach, product capacity, and cost attraction to a customer, within the provision of financial services.

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The Traditional Business Model: Delivering Value and Profiting

I see people overcomplicating their business all the time. At its heart, a business structure is pretty simple, so your business model should match to be clean, logical and straightforward too.

Simply put, a business model is your company’s plan for making a profit. Going further, Investopedia identifies your business model as, “The products or services the business plans to sell, its identified target market, and any anticipated expenses.”

Basically, it answers all the hows of your business operation.

As well as having a business model, you need to keep it flexible. As nice as it might be to set up a ‘perfect’ business and see profits roll in for 40 years on auto-pilot, it just doesn’t work that way. The market is changing, the way people handle and think about money is changing, and what and how people are buying is constantly evolving. As a business owner, you need to keep one eye on the horizon while you have a hand on the steering wheel.

Don’t believe me? Think about how many big, successful, household names have fallen off the grid because of change. Let’s start with Video Ezy and Blockbuster – giants with everything behind them, now extinct.

Taxi companies, once rulers of the private transport roost, are struggling to compete with rideshare rivals Uber (and the many that followed suit). Local stores and department chains are being eclipsed by online international giants like Amazon, AliExpress and others that offer buyers the convenience of shopping at home with delivery to your door.

If you don’t keep up with the changes, you’ll miss out on growing your audience, expanding your reach or even just seeing your current numbers continue.

If you don’t have the type of product that’s flexible enough to move online, go digital or automatic, it doesn’t leave your hands tied, you can still get creative in other ways like social media conversations, Facebook groups, Zoom calls, at home appointments, Google My Business , group meetings, savvy websites….you can always expand in some direction with a little effort.

When you meet your customers where they are in terms of their purchasing desires, you give them big benefits that keep them coming back, which flows on to massive benefits to you in terms of building your business, your brand, and creating the type of workplace that is nimble and ready for anything.

What Is A Traditional Business Model?

The traditional buy-and-sell setup is that thousand-year-old market style where customers go to a physical place to get what they want. While this is the traditional form, there have always been disruptions and challenges to the main – travelling caravans and wagons selling wares, peddlers and door-to-door sales have all been part of the ever-changing landscape. Nothing has moved the market quite as fast as the internet though. As technology advances, becomes more reliable, widespread and trustworthy, we are seeing bigger shifts away from tradition.

Who wants to get in their car, navigate traffic, and wander from store to store to compare prices when you can do it all from home in your PJs?

Yes, you can still buy music CDs now, and even vinyl records hold their place with an eager target market, but it’s not the mainstream music product, that award goes to streaming and digital downloads, to the point where most laptops don’t even have CD players anymore.

The dawn of e-commerce is not a surprising turn of events. As much as we’ve depended on traditional sales models for centuries, online business models make things so much easier and cheaper for everyone.

Not only have times changed, but they will also keep changing. The next evolution is currently in progress, which is easy to manage if you take on small adjustments bit by bit, but if you don’t keep up, it will take you by surprise.

What Business Model Do You Need In The Digital Age?

How you sell, what you sell, who you sell to and why is unique to you and your business. Your business model can be anything you want it to be. I’d rather see my clients flaunting their personality in their business than some boring cookie cutter stamp that is pretty much meaningless.

I like how Michael Lewis describes it as “a term of art”. I agree. Just as art can be interpreted, understood, and created through various lenses, so can a business model.

The reason the traditional business model is being left behind is convenience, for both buyers and sellers. As our cities get busier and stores push for more profits for their stakeholders, customers are making demands for convenience, especially when it comes with better prices.

What New Business Models Work?

Businesses that are following or shifting to digital business models are thriving. With the new normal now set in and people comfortable with purely online interactions like Zoom and eCommerce sites, I don’t think we’re reverting to the traditional methods anytime soon.

Even so, it takes time to understand and plan out a new business model that will work for your product or service and be the right fit for your customers.

Options you can consider include:

1. Outsourcing

I’m a fan of outsourcing. I’ve been doing it for years and it’s fast and efficient. If businesses are online, what’s to stop you from being more inclusive and having employees from other countries?

There are incredible benefits of outsourcing and with the right planning and structure you can save up to 82.5% when hiring staff. Through outsourcing, you’re not only saving massive amounts of money, but you’re also giving opportunities to people all around the world.

2. Subscription

YouTube, Spotify, and Netflix are examples of subscription businesses. This method ensures a steady income. You get paid a fixed amount monthly, regardless of how often your customer logs into your products. Subscriptions can also give you real-time feedback on what items are being used, how often and when, so you get a better read on your target audience’s desires as well as the hot and cold spots, allowing you to adjust your offer to stay with the highest demands.

3. Platform-based

Facebook, Uber, and Airbnb are examples of platform-based businesses where a third-party network facilitates your direct connections and builds a community. The platform gets incredible insight into these communities and passes the brand recognition onto your business by association.

4. Customer value-obsessed

The best businesses solve a problem , do things better and improve other people’s lives. In order to thrive and really love what you do, every business should be incorporating this into their business model.

While “the customer is always right” is false (and toxic for you and your staff), it goes without saying that listening to what they want and say is the key to your ongoing business success. Incorporating personalised options is a great way to keep customers happy and feeling like they matter.

5. Tech-based

Apple, Google, Microsoft, Amazon and Facebook are among the world’s most valuable companies. What do they all have in common? They’re all tech businesses. To say that technology is advancing rapidly is an understatement. Groundbreaking tech innovation is so commonplace we hardly notice it anymore.

Why Make the Shift to a Digital Business Model?

Having the ability to adjust your approach to meet whatever is on the horizon keeps your business nimble enough to change direction and keep pace with the front of the pack. What I love most about it is you also set your business up to scale and reach the next level without major stress and ongoing teething problems. Well-run systems also allow you to check in more easily to see how your business is going when you’re not hands-on with the daily operations.

The more you consider the gaps and simplify your business, the more control and freedom you have to spend time with your family and loved ones, go on a holiday or just live a life outside of work.

Leaving your business model on auto-pilot, even when the going is good, means those entrepreneurs out there that are making subtle changes and improvements are getting ahead of you. Knowing where to start can be as easy as getting an outside opinion to help challenge you to make changes that might be overwhelming on your own.

Evolve your business today

How to turn a traditional business into a platform-based success

Platform-based business models are open, scalable, connected and intelligent. Image:  REUTERS/Aly Song

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5 Common Business Valuation Methods

VALUATION   |  January 26, 2021  |  by Laura Fagundes

When deciding to sell your business, it’s important to understand what your business is worth from a financial point of view as you enter the M&A process. There are various ways to determine the value of a business, and various reasons to conduct a business valuation.

Here is a comprehensive overview of the business valuation process, including common valuation methods, when and why a valuation should occur, and things to consider following the outcome of a valuation.

Click below to watch a short video of the blog highlights, or continue scrolling to read the rest of the article.

What is a Business Valuation?

A business valuation is the process of analyzing and determining a company’s economic value. Professional evaluators are typically brought in to determine the value of the business. They then use one or more valuation methods to arrive at an objective number.

Below are five of the most common company valuation methods:

1. Asset Valuation

To determine your business's worth, this method involves an analysis of your company's assets (both tangible and intangible) using either the book or market value. Count all the cash, equipment, inventory, real estate, stocks, options, patents, trademarks, and customer relationships as you calculate the asset valuation for your business.

2. Historical Earnings Valuation

A business's financial worth can be determined by its gross income, ability to repay debt, and capitalization of cash flow or earnings. If the results of the analysis suggest your business struggles to bring in enough income to pay bills, this will cause the value to drop. Conversely, repaying debt quickly and maintaining a positive cash flow improves your business’s value. Use all of these factors as you determine your business’s historical earnings valuation.

3. Relative Valuation

With the relative valuation method, you determine how much a similar business would bring if they were sold. The calculation is made by comparing the value of your business's assets to the value of similar assets, which then provides you a reasonable asking price.

4. Future Maintainable Earnings Valuation

This method uses the potential future profitability of your business to determine its current value on the market. You can use the future maintainable earnings valuation method for a company’s business valuation when the company’s profits are expected to remain stable. It analyzes the sales, expenses, profits, and gross profits from the past three years before valuing your business’s future maintainable earnings. These figures help you predict the future and give your business value today.

5. Discounted Cash Flow Valuation

If your business’s profits are not expected to remain stable in the future, you can use the discounted cash flow valuation method. It takes your business’s future net cash flows and discounts them according to present-day values. This will allow you to adjust the valuation of your business based on how much money your business assets will make in the future.

For the best and most accurate results, compare two or more methods so you’re prepared for the merger and acquisition process and can confidently stand by the value of your business.

Pre-Money vs. Post-Money Valuations

When selling your business or seeking financial investments, it's important to understand the concepts of pre-money and post-money valuations. Here is a brief look at these valuation models, as well as the similarities and differences between the two methods.

In the simplest of terms, the pre-money valuation method is the financial figure used to describe the overall value of a business prior to any capital investments. This type of valuation is generally calculated by evaluating factors such as assets, liabilities, revenue, profits, and a series of other pertinent financial factors that are often dependent upon the nature of the business and the segment of the economy in which it resides. In addition, the analysis will likely include an examination of the company’s business plan and marketing strategy, global business strategy, the relevant market, competitors in the space, and other external economic factors that will ultimately influence the business’s ability to grow and thrive. This assessment is based on the company’s standing before there are any fundraising rounds.

The post-money valuation method is a financial approach used to determine the value of a business after the injection of capital, often through some form of fundraising. With a post-money valuation model, an investor offers a sum of money based on a stated post-money valuation. Of course, this means that there is also an implied pre-money valuation amount inherent in that offer. The value of the shares prior to the investment is simply the pre-money valuation divided by the number of outstanding shares. However, to receive the investor’s capital, new shares must be issued. This means that the overall number of shares increases, which then dilutes the original shareholders portion of the pie.

For example, if a business initially issued 100 shares to the market worth 10 dollars each, and an investor offers $500, then the investor will receive 50 shares ($500/$10). Then there would be 150 outstanding shares with the original shareholders owning 100 shares and the new investor owning 50 shares. This means that the original shareholders’ portion is reduced from 100% to 67%. But if business goes well and more money is invested down the line, the value of the shares should begin to increase as well as the post-money valuation of the company. Thus, even though investors may own a smaller percentage, they do so at a higher value per share.

How Frequently Does a Business Valuation Need to be Performed?

A business valuation may be performed at different points in a company’s existence for various reasons, most often related to investment decisions, exit planning strategy, a potential sale or buyout, or due to an impending IPO.

Because it is recommended to hire a reputable analyst to perform the valuation, the process can be costly to carry out. It’s also a time-consuming process given the amount of information that needs to be collected and analyzed. For larger enterprises, the time and complexity involved often serve as a deterrent to engaging in regular valuation assessments.

However, the economic climate is frequently in flux, influencing the financial status of virtually every business, which is why many companies find an annual valuation analysis to be desirable. Although there is no hard and fast answer as to how frequently a business valuation should be performed, here are a few ways to approach the process.

Very Rarely or Never

For smaller companies that do not plan to receive financial support, seek capital infusions, or sell their businesses at some point down the road, it may be possible to avoid going through the valuation process altogether. Granted, this seems like an unlikely scenario, but there are entrepreneurs who are quite territorial when it comes to their hard-won creations, so this certainly could happen. But even if a company does not intend to engage in any large-scale investments or transactions, it could end up being helpful to determine a company’s valuation for planning business, financial, and innovation strategies and increasing profitability. As a result, learning the business’s valuation one time or perhaps every five to ten years may prove worthwhile.

Every One to Two Years or As Needed

There are plenty of companies that engage in high-volume investing, seek financing and capital on a regular basis, or participate in other types of activities that necessitate the occasional valuation. In these instances, the analysis could be conducted as needed or every one to two years. Obtaining an occasional valuation is probably sufficient for most companies. Because the economic landscape shifts so frequently, most valuations are likely only accurate or valid for a year or less.

On a Regular Basis

Performing a business valuation on a frequent basis is most common for large companies engaging in high-stakes activities and transactions. However, these companies are likely seeking the valuations of other firms more than they are assessing their own valuation. Additionally, for startups experiencing significant success in a short period of time, their estimated valuations will change more dramatically, but these cases tend to be the exception rather than the rule.

Considerations Before Conducting a Business Valuation

Many startups become consumed with the valuation process, in hopes of obtaining higher levels of funding. Although valuation is undoubtedly a key figure in the fundraising process , there is also some potential downside that results from a high valuation.

Here are some of the common outcomes for companies that receive a high business valuation:

Higher Expectations

If a company manages to secure an impressive valuation at the outset, they are usually expected to soar to success in record time. In general, a high valuation will entail some hefty investments, and anytime substantial sums of money are on the line, some pretty high expectations go along with that. Unfortunately, such high expectations may be an impediment to a startup's ability to succeed. With so much pressure to deliver, companies often try to do too much too soon. Clearly, there is a belief that monetary resources will support such efforts, but a lack of structure, skills, and know-how often prove problematic for a business.

Rather than impose stressful expectations from the beginning, conservative goals and measures should be put into place. Then, if a business does extremely well, they are exceeding expectations instead of falling short or barely meeting them, which is far more likely to occur with a high valuation in the early stage.

Less Flexibility

In addition to the imposition of high expectations that may be difficult to meet, large investments associated with a high valuation often correspond with other conditions and restrictions. Although investor mandates are usually meant to mitigate risk and protect invested capital, these restrictions can make it harder for company founders to act in a strategic manner that would eventually behoove the business.

It is a lot easier to engage in risky maneuvers when someone else's money is at stake, but a lot harder to justify and deal with the potential fallout. A higher valuation may seem like more dollars to work with, but it generally results in far less flexibility.

Potential Down Rounds and Dilution

In some cases, high valuations actually end up damaging a company when unforeseen circumstances arise and subsequent fundraising rounds are needed. In the event that things do not proceed as planned, companies may be forced to engage in a down round, undermining the company's value and essentially negating the high valuation given in the first place. And, down rounds ultimately mean dilution for the original investors, who may balk and bail as soon as possible, further damaging the business. Companies have to proceed with realistic valuations or risk having all of their hard work be for naught.

Irresponsible Spending

A financial or capital infusion creates a lot of opportunities for budding entrepreneurs, but there is something to be said for creating something big out of something rather small. The ability to grow and problem-solve on a frugal budget typically bodes very well for a company’s future. And, if taking that path, any subsequent need for funding to further accelerate that growth trajectory will actually help to justify a decent valuation, without having to worry about the external hindrances and obstacles that a high initial valuation may have presented.

Even entrepreneurs who understand that valuation is just one of many important facets to a deal probably have to fight the urge to seek the highest number possible. In some cases, bigger simply is not always better, especially in the early stages, and ascending to that peak must occur via a more natural progression.

How a Virtual Data Room (VDR) Helps During a Business Valuation

If you’re ready to move forward with your business valuation, investing in a virtual data room (VDR) to help organize and securely share your sensitive company documents is a good next step. Even if you aren’t ready for a valuation, using a virtual data room as an ongoing repository helps keep your important corporate information in a central location, so you’re always prepared with the documents needed for analysis, a valuation, and other M&A activity. A VDR is a secure online database used to share confidential information, most commonly related to major financial transactions. Because a company valuation typically requires outside parties to access sensitive company information, many businesses adopt a VDR to expedite the process.

SecureDocs Virtual Data Rooms include helpful features such as:

Permission-based user roles - VDR administrators can assign granular levels of folder access to third parties performing the business valuation

Audit logs - admins can see who accessed various documents and other actions performed in the data room

Advanced security features - multi-factor authentication, data encryption, document watermarks, and other security measures ensure your sensitive data is shared only with authorized users

Unlimited users and documents - invite as many users as needed to get the job done without worrying about added fees

Start your free trial of SecureDocs to see how easy it is to get your virtual data room up and running.

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Home » What Is a Business Model? Definition and Examples

What Is a Business Model? Definition and Examples

May 31, 2023 max 4min read.

This article covers:

What Is the Business Model?

Types of business models, how to create a successful business model, case studies.

In a vibrant marketplace, food trucks showcase creative business models. The Tasting Carousel offers bite-sized portions from different cuisines, inviting customers to embark on a culinary adventure. The Custom Cravers allows customers to personalize their meals, while The Surprise Supper adds an element of mystery. 

These unique business models cater to individual preferences and create memorable dining experiences. Like these food trucks, a business model combines creativity, innovation, and customer understanding to stand out in the marketplace.

In this article, let’s get to know all about business models. 

Business model definition:

A business model outlines the fundamental logic and strategy behind a company’s operations, guiding its decision-making processes and providing a roadmap for sustainable profitability. It defines how a company generates revenue, manages costs, and ultimately achieves profitability or other defined objectives.

We will broadly categorize the types of business models into two.

Traditional Business Models:

• Brick-and-mortar store: Physical store selling products directly to customers.
• Franchise: Licensing of a recognized brand and business model to individual entrepreneurs.
• Manufacturing :
• Mass production: Large-scale production of standardized products.
• Custom manufacturing: Tailoring products according to specific customer requirements.
• Professional services: Offering specialized expertise or skills, such as legal, accounting, or consulting services.
• Hospitality: Providing accommodation, food, and related services to customers, such as hotels or restaurants.
• Wholesale and Distribution:
• Wholesaler: Purchasing goods in bulk from manufacturers and selling them to retailers.
• Distributor: Acting as an intermediary between manufacturers and retailers, facilitating the movement of goods.

Innovative Business Models:

• E-commerce:
• Online marketplace: Providing a platform for multiple sellers to showcase and sell their products.
• Subscription-based model: Offering products or services on a recurring payment basis, providing convenience and regular access.
• Sharing Economy:
• Peer-to-peer rental: Enabling individuals to rent out their assets directly to others, such as homes (e.g., Airbnb) or vehicles (e.g., Uber).
• Crowdfunding: Collecting small amounts of money from many people to fund a project or venture.
• Free basic service with premium upgrades: It offers a basic version of any product or service for free and charges for additional features or functionalities.
• Platform-based:
• Platform-as-a-Service (PaaS): Providing a platform that allows developers to build and deploy applications.
• App-based platform: Creating an ecosystem of applications that operate on a single platform, such as app stores.

These are a few examples; however, many other variations and combinations of business models are within each category.

Here are some steps you can follow to develop a solid business model:

• Identify your target market : Clearly define your target audience to understand their preferences, needs, and pain points. Conduct market research to gather relevant data and insights about your potential customers.
• Define your value proposition : Determine what unique value or solution your business offers customers. Your value proposition should address a specific problem or provide a significant benefit that differentiates you from competitors.
• Choose a revenue model : Decide how your business will generate revenue. There are various revenue models, such as product sales, subscriptions, licensing, advertising, or a combination of multiple models. Select the one that aligns with your offering and target market.
• Analyze the competitive landscape : Assess your competitors and their business models. Identify their strengths and weaknesses, and check to find opportunities for differentiation and innovation. This analysis will help you position your business effectively.
• Develop a marketing and sales strategy : Determine how you will promote your product and service to reach your target market. Create a marketing plan that includes channels, messaging, pricing, and distribution strategies. Define your sales process and customer acquisition strategy.
• Build partnerships and alliances : Consider establishing strategic partnerships and alliances with other businesses that complement your offerings. These partnerships can help expand your reach, enhance your capabilities, and create new opportunities.
• Create a financial plan : Develop a comprehensive plan outlining your revenue projections, cost structure, and funding requirements. Consider factors such as pricing, expenses, cash flow, and profitability. This plan will guide your financial decisions and demonstrate the viability of your business model to potential investors or lenders.
• Test and iterate : Once you have a clear business model, test it in the market. Gather feedback from customers and adapt your approach based on their responses. Continuously iterate and refine your model to improve its effectiveness.
• Monitor and measure key metrics : Establish key performance indicators (KPIs) to track the business model’s success. Monitor customer acquisition costs, lifetime value, revenue growth, and profitability metrics. Regularly evaluate your performance and make data-driven decisions.

Successful Business Models:

Netflix is one such successful business model example we can think of. It revolutionized the entertainment industry with its subscription-based streaming model. By offering a vast range of movies and TV shows through an online platform, Netflix disrupted the traditional video rental market dominated by Blockbuster. 

They focused on delivering convenience and personalization to customers, leveraging data analytics to recommend content based on user preferences.

Failed Business Models:

Blockbuster

Blockbuster was a dominant player in the video rental industry. However, they failed to adapt to the shift toward online streaming and the decline of physical movie rentals. Blockbuster relied heavily on brick-and-mortar stores and late fees, inconveniencing customers. 

Their inability to recognize the changing preferences of consumers and embrace new technologies ultimately led to their downfall.

More Like This :-

• Product Differentiation: Examples and Strategies
• Porter’s Five Forces: How to Use this Model? (Examples)

The four components of a business model are:

• Value proposition
• Revenue model
• Cost structure
• Key resources and key activities

A business model is a conceptual framework that describes how a business creates, delivers, and captures value. It focuses on the fundamental aspects of a business, such as its target market, value proposition, revenue streams, and cost structure.

In contrast, a business plan is a comprehensive document that outlines the specific strategies, tactics, and actions a business intends to take to achieve its objectives. It includes sections like company description, market analysis, marketing strategies, financial projections, and implementation timelines.

A well-designed business model should be adaptable and regularly reviewed to align with market dynamics and ensure long-term success.

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Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options by

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TRADITIONAL VALUATION METHODS

Despite their differences, both expectational and valuation models are ultimately trying to do the same thing: Identify those companies for which the current expectations built into today’s stock price are wrong. Traditional equity valuation models and methods are simply systematic ways of trying to make that identification.

The four primary traditional methods for equity valuation use the price-to-book ratio (P/B), price-to-sales ratio (P/S), price-to-earnings ratio (P/E), and the dividend discount model (DDM).

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Traditional Types of Business Models

A business model is simply the overarching plan of a company to generate a profit by selling a service or a product. The business model provides an outline of the plans of the company to produce a product or service and to market it. This plan also includes the expenses that will occur with manufacture and marketing of the service or product. Different business models exist, each of which can suit different companies and types of businesses.

Manufacturer

The manufacturer business model utilizes raw materials to create a product to sell. This type of business model might also involve the assembly of prefabricated components to make a new product, such as automobile manufacturing. A manufacturing business can sell the products created directly to customers, which is known as the business-to-consumer model. Another option involves outsourcing the sales aspect of the process to another company, which is known as the business-to-business or B2B model. Wholesaling manufacturers typically sell products to retailers, which then sell directly to consumers. An example of this type of company might be a clothing manufacturer that sells merchandise to a retailer, which then sells to consumers.

Distributor

A company fitting the distributor business model would be a business that buys products directly from a manufacturing company. This business would then resell the products directly to consumers or to a retailer. The distributor often acts as one of the middle points between a manufacturer and the general public. Distributors have the challenge of setting price points that will produce a profit while also utilizing effective promotion strategies that will secure strong sales. Competition can be fierce for distributors, which necessitates continual analysis of the market.

A retailing business purchases products directly from a wholesale or distributing company, then sells the inventory directly to the public. Retailers often utilize a brick-and-mortar location for points of sale. Examples of retailers include grocery stores, clothing stores, and department stores. Retailers might be nationwide chains, or they could be independent shops operated by a single entity. A physical location for a retailer is common but not mandatory. Retailers may choose to offer sales as an online retailer. Online retailing can be done alone or in combination with selling from a physical location. Retailers experience the ongoing challenge of competing against other retailers that offer similar products.

A franchise business model might involve any of the other business models, such as manufacturing, distributing, or retailing. Franchise business are set up according to the unique service or product sold or produced. The business model of the franchise is adopted by the purchaser of the franchise, who is known as the franchisee. Purchasing a franchise has some important benefits for the franchisee, since most business processes and protocols are already established for the business. However, with these established protocols come less flexibility for the franchisee.

Additional Business Model Structure Options

Within these four standard business models, business owners can structure their companies to include specific features of one or more models. For example, a company that engages in direct sales to consumers might integrate a process of product demonstrations in the consumer’s home. Companies could also engage in direct online sales without the use of an intermediary company. Retailers that utilize both a physical store location and a website could offer online sales for consumers who could then pick up their items at the brick-and-mortar store. Companies might also hold Internet auctions for sales. Some businesses also utilize a sales approach that offers a free basic service with the option to upgrade to a paid, premium service. Business model structures can vary significantly, and companies might explore a wide array of combinations to find a model that meets with success.

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