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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)ˆ3= 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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