Pre-Money Business Valuations For Investors

When you are a start-up with no business operations and no assets creating a reasonable valuation can be a hefty task.  Most business valuations utilize one of the following valuation models:

  • Asset Approach to Business Valuations,
  • Income Approach to Business Valuations, or
  • Market Approach to Business Valuations.

These approaches can limit the real valuation a company or startup venture is worth after is acquires funding.  For example, if a real estate company currently has assets of $1,000,000 but is looking to raise $10,000,000 and expects a return of 10x on the invested money, a current valuation of the company’s assets will not showcase to investors the possible return on investment after the money is put into the company.

Similar a startup ecommerce website or blog network’s income in its current state will most definitely not be the same income the company should expect to receive after a round of financing.  For example if an online store has 10,000 products and makes $100,000 in yearly revenue and is seeking an investment of $100,000 to list over 1,000,000 products on its website…you can see that your post-money valuation (the valuation of the company after it receives financing) should reflect this increase in potential sales.

Investors can benefit from smart pre-money and post-money valuations as well.  After all if an investor puts capital into a business they are seeking a solid return and should want the company to succeed.  An intelligent valuation will account for intellectual property assets, the value of current customers AND physical assets such as land, cash or marketable securities.

When hiring a consultant, CPA or analyst to value your company or venture a conversation should be had on what methods will be used to value the company as well as why the company is being valued in the first place.  In some cases a client-company does not want the highest valuation probable and will seek a lower valuation.  In many cases management wants to know the range of valuations for any particular company so that it will be well prepared to negotiate the purchase, sale or funding of the company.

If you are in need of a business valuation for your company or client or if you are looking to purchase or sell a business and need a business valuation , please contact us today.

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