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%
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%
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1 Comments:
This is not correct. While VCs may expect their portfolio to return 30%/year, depending on the stage of the company, they should expect 80% to 200% return a year from each individual investment to account for dilution in subsequent financings and the fact that most investments don't really make it. This 30% number deludes entrepreneurs and provides a false valuation expectation.
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