Deal Pricing
The price you pay for debt capital (money from a lender) is determined by an interest percentage. The price you pay for equity capital (money from investors) is determined by the percentage of your company that you give up. The value you and your investors assign to your company will determine how much ownership you’ll have to relinquish.
This isn’t a trivial exercise, and we explain it in detail in the Finding Money ebook. Four key issues weigh heavily on the valuation of an entrepreneurial company:
• Where the business is going and how big it will be when it gets there;
• How risky this investment is, relative to other investments;
• What price has been paid for similar companies; and
• How and when investors will be able to cash in their chips.
But different investors will value your businesses differently. An investor who’s investing for strategic reasons may have lower return expectations than someone who’s investing with the hopes of getting rich on your success. Time-Warner put over $100 Million into the an interactive cable television system back in the ’80s without much hope of ever realizing a direct financial return. But the publicity they gained from the operation, and the promises they could make based on the technology, helped them win cable franchises that paid for the investment many times over.
A valuation expert will work through a variety of different methods to arrive at a fair and justifiable value for your company. These methods include an Income-based valuation where your projected performance is valued using a discounted cash flow formula; an Asset-based valuation where a value is determined based on the liquidation value of assets less liabilities; and a Market multiplier-based valuation where some multiple is assigned to your projected income, net income, or other performance measure.
Yes, we explain all that in the ebook.
