How to Valuate Your Business

How to Valuate Your Business

The venture capitalists will usually look at your projected, or pro forma, earnings 3 to 5 years from the point of their investment. From there they will deduct a 30% annual return that they expect to receive and will subtract a further percentage for the fact that you are a private and therefore non liquid company. This is known as the pre-money valuation.

Right now, investment money is scarce and the venture capitalists are dramatically lowering business valuations.

How Northern Crown Capital Valuates a Business

2008 Financial Projections

Earnings Before Tax
$5,865,000

Tax Rate
42%

Taxes
$2,463,300

Net Earnings
$3,401,700


Amount Seeking to Raise Today
$3,500,000

Discounted Value of Future Opportunity, 5 Years Out

2008 P/E Ratio
15

Value of Company in 2008
$51,025,500

Discount Rate Applied
30%

Year 2008
$51,025,500

Year 2007
$35,717,850

Year 2006
$25,002,495

Year 2005
$17,501,747

Year 2004
$12,251,223

Value of Company at Investment in 2003
$12,251,223

Less: Investment Amount
$3,500,000

Present Value
$8,751,223

Discount for Risk & Private Company
40%

Less: Discount for Risk & Private Company
$3,500,489

Private Company Value
$5,250,734

Present Value (What the Owner Keeps)
$5,250,734
60.00%

Financing (What the Investor Gets)
$3,500,000
40.00%

Total
$8,750,734
100.00%

For more information, visit www.EvanCarmichael.com.