While small business owners and biotech startup firms may be aware of the need for business valuation services in advance of a planned sale, they may not be aware of the difficulties involved in evaluating businesses that have specialized intellectual property. Although your small business should get at least an informal business valuation every fiscal year, you will probably need to get a formal assessment before you take your business to sale.
There are more than 25 million small businesses, and more startups each year. While 70% of new businesses make it through the first two years, the majority go out of business within 15 years: if your business is to have longevity, you need to strike a balance between outside investment and customer satisfaction. Too often, small businesses do not establish an effective presence on the internet: if you’re unable to reach new customers, the likelihood of your continued success is low. Internet marketing and advertising has all but replaced traditional marketing methods: the return from mass emails is triple that of the return from digital advertising.
If your small business is a biotech startup, you may be looking for more funding streams. Part of the difficulty that biotech startups have during a sale revolves around the accurate assessment of their intellectual property. Valuations focus on past performance and sales, but biotech companies may have more potential than they do track record. Any biotech business valuation firm has to have a clear understanding of their client’s particular industry and the potential that startups have to contribute to their field. Often, small biotech startups do not own many assets, and a business valuation firm may have trouble finding comparable businesses to drive their assessments.
Another critical factor that can influence a biotech startup’s business valuation is the fact that their products may not have reached the testing phase yet. In general, only one out of every 5,000 new medications reach the trial phase of development, and then only 20% are approved for use and sale in the United States. Business valuation tools that understand the vagaries of medication development must be used, because the vast majority of biotech startups sell before they reach the testing phase. Investors may feel excited about the possibility of a lucrative new medication, but caution is advised for tech stocks and biotech firms.
In a sense, any new company goes through an experimental phase. How do we reach our customer base? How do we enhance customer loyalty and begin to create a company that we can bank on for retirement? In the last decade, however, online retailers have taken over the customer base for small businesses to a very large extent. While small businesses have a better chance of reaching an international audience, they may struggle to find customers in their local area. Digital marketing needs to focus more on customer engagement, and small businesses that establish a strong online presence may find that they can significantly raise their asking price. Investors want to be able to take over a business that has an established client base and clear internal organization: a business valuation firm has to take dozens of factors into account before they make their final report.
About half of all biotech startups report that they do not have a budget for operating expenses past the two year mark: if they want to continue their research and development, they need to attract more investment. In the event of an impending sale, business evaluation services have to walk a very fine line between optimism and realism. It’s important to focus on delivering investors a positive financial return, but if the product is untested, startups cannot guarantee an attractive return on investment. The world of investing is sufficiently complex without adding in the difficulty of medication development, but there is still ample opportunity for small startups to have their businesses assessed by a professional business valuation firm and to sell their intellectual property for a fair price.