Venture Financing:

Step-by-step Guide

Business Valuation

How Much Is Your Business Worth?

By Venture Planning Associates. Used by permission.

Reasons to Value a Business

  • When Buying or Selling

  • When Raising Ventures Capital

  • Payment of Estate taxes

  • Divorce Settlements

  • Buy/Sell Agreements

  • Stock Re-capitalization

  • Payment of Gift Taxes

  • Shareholder Disputes

Information Required (maximum number of years possible)

Venture Financing: Key Documents To Be Prepared

Seven Valuation Types

  • Adjusted Net Assets

  • Capitalization of Earnings

  • Dividend Paying Capacity

  • Excess Earnings: Return on Assets

  • Excess Earnings: Return on Sales

  • Discounted Cash Flow

  • Discounted Future Earnings

  • Combination Method Weighted Average of All Types

 

Conventional Valuation with Variations and Averaging

Generally, Venture Planning Associates offer programs that give the total business value, however it may be possible to value a portion of the stock, to add a discount or premium to stock as well.

For an example of a conventional venture capital valuation with variations see the chart below.

 

Valuation Calculation

Notes

Best Case

Worst Case

Expected Case

Base Year Revenue User input $500,000 $500,000 $240,000
Annual Growth % User Input 40% 10% 20%
Ending Year Revenue Calculated $3,500,000 $1,440,000 $2,750,000
Years to Harvest User Input 5 5 5
Target Year Revenue Calculated $3,500,000 $1,440,000 $2,750,000
After Tax Profit % User Input 50% 10% 30%
Target Year Profit Calculated $1,750,000 $275.000 $432,000
Price/Earnings Multiple User Input 12 12 12
Future Value of Venture Calculated $21,000,000 $3,300,000 $5,184,000
Required Annual Return % Lookup * 51.6% 51.6% 51.6%
Present Value Factor Lookup * 0.132 0.132 0.0132
Discounted Present Value Calculated $2,772,000 $435,600 $684,288
Required Equity Investment User Input $250,000 $250,000 $250,000
Equity Sold/Purchased Calculated 9.02% 57.39% 36.53%
Probability by Case User Input 10% 50% 40%
Wtd. Ave of Scenarios Calculated percentage stock to be sold = 44%    

* NPV and P/E ratios from data bank sources for your business type

First Chicago Method

The First Chicago Method is used to value venture type businesses by Venture Capital firms.

High risk ventures are usually valued using the First Chicago Method that evaluates probabilities of success (IPO), the sideways scenario, and the failure scenario (liquidation).

This method uses a high-risk adjusted, discount rate and embodies many assumptions.

We specialize in the First Chicago Method as a means of determining the pre and post investment values for entrepreneurial (pre-IPO) business investments.

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