Today I’ll finish my series on the Entrepreneur’s Guide To Venture Capital.
How To Valuate A Business
One of the most common questions I get around venture capital financing is how to determine the value of a business. Here is how we did it when I was in the business:
2013 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
2013 P/E Ratio 15
Value of Company in 2013 $51,025,500
Discount Rate Applied 30%
Year 2013 $51,025,500
Year 2012 $35,717,850
Year 2011 $25,002,495
Year 2010 $17,501,747
Year 2009 $12,251,223
Value of Company at Investment in 2004 $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%
At the end of the day the venture capitalist will make an offer and you negotiate from there. This model is far from perfect but does give you a starting point to valuate your business.
