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How To Valuate Your Business

Written by: Evan Carmichael

Article Overview: 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.

How To Valuate Your Business

Venture Capital - 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.

Venture Capital - How Northern Crown Capital Valuates A Business

2009 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 2009: $51,025,500
Year 2008: $35,717,850
Year 2007: $25,002,495
Year 2006: $17,501,747
Year 2005: $12,251,223

Value of Company at Investment in 2005: $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%

Venture Capital - Valuating A Business: Examples

Over the past 3 to 4 years, venture capitalists have been very conservative with their investments. This is because they have had so many problems within their current portfolios that they cannot afford to take the same risks on new companies.

The method of valuation will also depend on your industry. In a traditional, or smokestack, industry there are typically many comparative examples. Here you can work from the earnings before interest, tax and depreciation (EBITDA) of similar companies and apply a ratio to your own business.

New products and technologies pose a valuation problem due to the lack of comparative companies. It is much more difficult to valuate these businesses.

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Article Tags: amp, br, business examples, business valuations, financial projections, investment money, investments, investor, northern crown, portfolios, pre money, present value, private company, pro forma earnings, risk, tax rate, venture capital, venture capitalists



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