How to Value Fintech Companies and Startups?
Fintech is a popular buzzword used to market many products that touch our lives every day. Entrepreneurs have raised billions of dollars in venture capital for their fintech firms.
You’re ready to sell your company for a lot of money and use the proceeds to finance your retirement or next venture. These are the questions that come to mind first. What’s your fintech business worth? How to value a fintech company? Is the value that someone is willing to pay?
It is vital to measure the valuation of it to plan progress and secure investors, to measure realistic growth. There is no single formula that can precisely value a fintech business. Valuing a business venture in the FinTech sector is a critical task. At the same time, it looks challenging and complicated sometimes. If you haven’t done this before or are not experienced enough to search for this content, you are in good hands. In this post, we will explain how to value a business properly, so let’s get started.
The Hidden Potential Of Fintech Companies
The digitalization of the world has created an excellent opportunity for Fintechs and SMEs to work together for mutual benefit. These eight themes represent subcategories where fintech companies can actively work to simplify the daily lives of SME owners and employees.
- Compliance and cybersecurity
- Business solutions and platforms
- Finance, liquidity, and investments
- Digital banking
- Data analytics
- Accounting and payroll
- Employee benefits
A FinTech company has its inherent value, which takes a complicated task to determine. The implications and investments that a FinTech company bears have significant value for its employees and investors. To maximize value, many fintech founders can focus on critical elements of their business to ensure your company is best placed to build revenues. This industry is evolving day by day. Consumers changing habits force the digital ecosystem to produce more fintech solutions. That’s why the fintech industry is consecutively in the highest number of unicorns.
Prepare Your Business Information
First things first. Before you start, you should list all the related items by dividing the categories. Sales, Staff, Finance, Legal and Other categories could be the right place to start.
Quick Notes To Start:
- Sales predictions and forecasts, and previous records should be on the table. Employees, suppliers, and customers’ details should be well prepared.
- Your financial statements should include; cash flow statements, debts, annual turnover, and profit and loss statements.
- Legal documents such as leases and insurance policies must be ready.
- Registration papers such as business name certificates are essential.
- Additionally, you can prepare market conditions and details of competitors.
Business Valuation Methods to Determine The Value
Regardless of the stage of development, understanding the value of a FinTech company is crucial to everyone with interest in the company. There are three common approaches to evaluating business value: asset valuation, income valuation, and market valuation.
Asset Valuation: Asset Valuation is the process of determining the current value of a company’s assets like stocks, buildings, equipment, brands, goodwill, etc.
Income Valuation: A reasonable assessment of value that relies on considerations for the FinTech company can also be obtained with the income approach. The methods and formulas used for financial value, securities analysis, and bond pricing are similar in fundamental or general terms.
These methods include six steps: Estimate PGI, Deduct vacancy and collection losses, add miscellaneous income to derive EGI, Deduct operating expenses to derive NOI, select the appropriate capitalization rate and method develop an estimated value.
Market Valuation: Market valuation, it’s also known as OMV, or “open market valuation doesn’t provide a single formula for valuing a company because of the varying financial markets and country-specific obstacles. It is often used to describe how much an asset or company is worth in a financial market.
We accept valuing a FinTech company could be a complex and unpredictable task at the beginning because it needs deep knowledge about the business itself and an understanding of the essential KPIs in the fintech industry. To best build their future revenue, founders need to stick to the critical components of their business, ensuring it remains the center of their strategy and growth potential.
No matter which type of business you have (a fintech startup or a well-established fintech company), many Fintech products and services will keep touching people’s lives almost everywhere. These products will keep bringing about widespread impacts and changes in our lives.
Also, the digitalization trend has exploited the pandemic to form a fruitful partnership between Fintechs and SMEs in the face of an excellent opportunity for mutually beneficial business models. On the other hand, it is a challenging period for FinTech companies as the market and regulatory environment are constantly evolving, which is a complex process for any company to manage.
In general, many people see the value of fintech businesses as subjective, and it truly depends on the fintech market and what the business offers. When you value your business, don’t forget to add these positive effects to your calculation.
Now is a good time to consider finding a buyer for your business or allowing an investor or team to help fund your next venture. Good luck!
Bonus: If you are interested to learn about FinTech startups, look nowhere else. We gathered top FinTech startups of London that you should watch out for in 2022.