7 minute read

Pre-Revenue Valuation Methods for Small and Growing Businesses

Business valuation metrics and charts displayed on computer.

Valuing a business before it generates revenue can be challenging, but it's sometimes necessary whether you're planning to sell your small business or looking to buy one that's still in its early stages. While this situation is common with startups, it can also apply to established businesses entering new markets or adding new product lines. Understanding how to assess value based on assets, strategic positioning, and potential cash flow helps both sellers set realistic expectations and buyers evaluate opportunities.

Types of Valuable Assets in Pre-Revenue Businesses

Physical Assets and Equipment: Consider the value of machinery, tools, inventory, or physical goods owned by the business. For small businesses, this might include everything from manufacturing equipment to office furniture.
Intellectual Property: This includes patents, trademarks, copyrights, or proprietary methods that give the business a competitive advantage. Even small businesses can have valuable IP, such as unique recipes, custom software, or specialized processes.
Licenses and Permits: Industry-specific licenses, certifications, and permits that are required for operations and can be transferred to a new owner.
Location and Lease Agreements: The value of owned real estate or favorable lease terms, particularly important for retail and service businesses.
Built-Out Facilities: Customized workspaces or improvements that won't need to be replicated by a new owner.
Supplier Relationships: Established vendor relationships and agreements that ensure reliable supply chains and favorable terms.
Employee Contracts and Training: Skilled staff and management teams that will remain with the business after a sale.
Marketing Assets and Brand Recognition: Local or online brand presence, customer lists, website traffic, social media following, and marketing materials.
Systems and Processes: Documented procedures, operations manuals, and efficient workflows that can be transferred to new ownership.
Technology and Software: Essential software licenses, custom applications, or technology infrastructure supporting the business.

Approaches to Valuing a Business

Several methods can help determine a pre-revenue business’s worth. Here are five practical approaches commonly used in small business valuations:

Asset-Based Valuation: Add up the value of all tangible assets (equipment, inventory, furniture) and intangible assets (intellectual property, brand value). This method works well for businesses with significant physical assets.
Development Cost Approach: Calculate the total investment made in developing the business, including equipment purchases, renovations, training, and market development.
Market Comparison Method: Research what similar businesses in your area have sold for recently. This can be particularly useful for common business types like restaurants or retail stores.
Future Revenue Potential: Projects realistic revenue based on market research, pre-orders, or letter of intent from potential customers. Be conservative and document your assumptions.
Replacement Cost Analysis: Estimate what it would cost someone to build a similar business from scratch, including time and effort to establish supplier relationships and market presence.

Industry-Specific Considerations

Different types of small businesses emphasize different assets and growth factors.

Retail and Restaurant Businesses: Location quality, foot traffic, lease terms, and built-out facilities are important. Local reputation and relationships with suppliers can significantly impact value.
Service Businesses: Customer relationships, reputation in the local market, and trained staff are often the most valuable assets. This includes professional practices, personal services, and B2B services.
Manufacturing Businesses: Equipment condition, production capacity, and established supply chains are key value drivers.
Technology and Online Businesses: Focus on intellectual property, user base, website traffic, and technological infrastructure. Even small tech businesses can have significant value in their proprietary systems or software.

Documentation Needed for Valuation

Accurate documentation is important when valuing a business, especially a business pre-revenue.

An asset inventory lists all tangible and intangible assets, such as equipment, intellectual property, and facilities.
Development costs also provide a detailed record of expenses incurred to build products, services, or infrastructure.
Comprehensive market research helps any pre-revenue enterprise understand the competitive landscape, target audience, and demand potential.
Another good rule of thumb is to have a well-prepared business plan. It should outline the company’s vision, strategies, and goals, serving as a roadmap for growth.
Financial projections are used to estimate future cash flows and profitability.
Finally, data on current market conditions, including recent valuations or sales of comparable companies in the same industry, offers context and benchmarks for determining worth and growth rate.

Common Valuation Mistakes

Mistakes in business valuation can lead to inaccurate assessments. These errors can deter potential investors or buyers, especially those averse to high-risk opportunities.

One common error is overestimating the value of intangible assets, such as market size, without sufficient documentation or market proof. Ignoring industry-specific benchmarks or failing to compare similar businesses can result in unrealistic valuations.
Another mistake is relying solely on future projections without grounding them in current data or trends.
Overlooking liabilities, such as debt or pending obligations, can inflate the perceived value.
Additionally, incomplete documentation or a lack of transparency regarding costs, liquidity, and operations may raise red flags for buyers.

How to Present Value to Potential Buyers

Properly conveying a business’s value pre-revenue requires targeting the right buyers and highlighting relevant assets.

Start by identifying potential buyers, such as competitors, industry angel investors, or businesses seeking strategic acquisitions.
Tailor your pitch to emphasize both assets and the future growth potential. For example, showcase intellectual property to innovation-focused buyers or operational efficiency to established competitors.
Use clear documentation, like asset inventories and financial projections. Both help build trust and credibility.
Be transparent about challenges and opportunities
Focusing on how your business fits the buyer’s goals

Remember to highlight tangible benefits for potential buyers, such as established customer relationships, trained staff, or market presence that would take years to build from scratch. A well-documented presentation focusing on real assets and realistic growth potential will be most effective in attracting serious buyers.

BizBuySell has many tools and resources to help you get started, whether you're buying, selling, or just looking for a market valuation: