Small company CEO's periodically ask me what I think their companies are worth. The question usually arises when the original company owner(s) are looking to sell equity in their company or to merge their company with another company. Company valuation is generally critical to these types of activities.
It continues to amaze me that small company CEO's don't think constantly about the value of their enterprises. Our job as entrepreneurs is to build the worth of our enterprises, our companies. Beyond the P&L's that owners consider daily, weekly, monthly, we should constantly consider what enterprise worth we are creating. This worth is wealth; this worth is value; this worth is our payoff.
As entrepreneurs, we always consider that our ideas, products, enterprises, etc. are worth a lot on money. Most of the time, we think that they are worth more than they actually are. I have always been guilty of this myself. The problem is that there isn't a market to figure out company valuations for us. Large publically traded companies have the NYSE or NASDAQ to determine company valuations minute by minute in open markets. Of course, there are companies that can actually appraise what smaller companies are worth if they decide to sell the company or stock in the company but this doesn't help us on a daily basis to determine value.
In determining company worth, as a daily ruler, I have always relied on a simple technique. I will periodically step back from my company and ask myself how much I would pay if I was on the other side and considering buying my company. It is amazing how different the valuation amounts were from me thinking as the owner (seller) and/or me thinking as a potential buyer of my company (buyer). I have never been willing to pay as a potential buyer of my company what I would want to charge as the potential seller.
Bottom line, a company is worth what someone will give for it at any given time. Small company CEO's need to focus on building company worth. If entrepreneurs think about building company worth, and make decisions based on increasing company worth, wealth will be created. Know what your company is worth; focus on building enterprise value.