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.
To learn more about this author, visit Evan Carmichael's Website.
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