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Company Valuation Model


This model explains a simple way to value a start-up company when working with investors. It is provided courtesy of Joe Ollivier of First Capital Development, a private investment and hard money lending firm based in Provo, Utah.


Explanation Example of XYZ.com
1. Assumptions
Investors will want somewhere between 50-100% annual return on their investment (ROI). The market will value the company on a P/E basis somewhere between 8-15 times earnings if it was a public company. While some internet companies have outrageous price to earnings ratios, you are better off to use a conservative price to earnings ratio.
XYZ.com Assumptions

ROI per year Investors want on their investment: 100%

The market will value XYZ.com somewhere around 15 time earnings.

Third year after tax earnings: $1,650,000

Initial Investment Needed: $1,000,000

2. Valuation
Multiply the p/e ratio by the third year after tax expected profit. This number gives you the estimated value of the company in three years. Why three years--that is traditionally what is used as a harvest time frame.
XYZ.com Valuation

P/E ratio multiplied by 3rd yr. after tax earnings equals estimated value of the company after three years.

15 x $1,650,000 = $24,750,000

3. Future Value of Investors Investment
Use the following formula to determine the future value of investors initial investment. Let PV equal the initial investment; let r equal the return on investment; let n equal the number of years; and let FV equal the future value of the investors investment.

PV(1 + r)n =FV

Future Value of XYZ.com Investors Investment

PV(1 + r)n =FV

1,000,000 (1 + 1.0)3= 8,000,000

4. Percentage of Company Offered
In order to determine the amount of the percent-age of the Company to be offered, divide the future value of the investors initial investment (see number 3) by the estimated value of the Company in three years (see number 2).
XYZ.com Equity Structure

8,000,000 / 24,750,000= 32.3%

Suggested Structure:
Founders 68%
New Investor(s) 32%
Total 100%

 

Source: First Capital Advisors

 

 

 

 
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