So how do you value a business that doesn't exist?

DubTony

I have an idea that needs financing. Banks won't touch it with a 40 foot pole as there are no tangible assets. How does a startup in this situation get financed? Obviously, selling off chunks of the business / company is the way to go, but how is the value determined?

kluivert

Ie Internet Business.

Valued by Fair Value or Market Value ie what people will pay for it.

This involves getting a valuation done.


You will have to do some sort of costing or P & L projections for three years and then pick a mutiplier based on the profits and your company is valued at that rate.

However, there are three ways to value a company by formula but I dont have to info at hand at the minute.

gettwo

So this maybe a bit theorectical but here goes;

1. Discounted cash flow: project the future cashflow for the immediate future 5-7 years and then a growth rate for the following years in perpetuity. And discount the cashflows appropiately.

2. Multiples. Use relevant multiples to compare your company to relevant companies in ireland or internationally. Its important to use a revevant ratio (eg a sales ratio not relevant for a start up)

3. Comparable transactions (but thats more for take overs)


All pretty technical but the methods they use in Investment banks.

Check out http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valn2ed/book.htm specifically CH23 for you!

Hope it helps and isn't too technical!

PS tangiable assets are not as important as future cash flow.
Plus keep in mind I'm a final year finance student so not speaking from much experience

stepbar

gettwo wrote:

So this maybe a bit theorectical but here goes;

1. Discounted cash flow: project the future cashflow for the immediate future 5-7 years and then a growth rate for the following years in perpetuity. And discount the cashflows appropiately.

2. Multiples. Use relevant multiples to compare your company to relevant companies in ireland or internationally. Its important to use a revevant ratio (eg a sales ratio not relevant for a start up)

3. Comparable transactions (but thats more for take overs)


All pretty technical but the methods they use in Investment banks.

Check out http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valn2ed/book.htm specifically CH23 for you!

Hope it helps and isn't too technical!

PS tangiable assets are not as important as future cash flow.
Plus keep in mind I'm a final year finance student so not speaking from much experience

TBH all of the above is great but banks need security of some shape or form - i.e. something tangible to secure the loan against. Some may accept personal guarentees, some dont. But TBH personal guarentees are only as good as the paper they are written on. The best way to go might be to get a partner on board (pref someone close to you), who is already in business and who could put up a guarentee using their own current banking relationship. Im afraid a lot of it's about building trust.

kluivert

stepbar wrote:

TBH all of the above is great but banks need security of some shape or form - i.e. something tangible to secure the loan against. Some may accept personal guarentees, some dont. But TBH personal guarentees are only as good as the paper they are written on. The best way to go might be to get a partner on board (pref someone close to you), who is already in business and who could put up a guarentee using their own current banking relationship. Im afraid a lot of it's about building trust.

Banks can accept a personal guarantee from directors up to a certain amount if agreed by the banks.

There is no requirement for tangible assets once the directors is will to place their own assets as security.

information

kluivert wrote:

Banks can accept a personal guarantee from directors up to a certain amount if agreed by the banks.

Make sure you put specific terms on the personal guarantee.

I've heard stories where people gave a personal guarantee,
then years later then went back looking for more money and expected to sign another personal guarantee.

But the bank manager said no need, took out the original personal guarantee and said that it was still covering every loan that had been taken out by the company, even where a persoanl guarantee was not required.

LoneGunM@n

DubTony wrote:

I have an idea that needs financing. Banks won't touch it with a 40 foot pole as there are no tangible assets. How does a startup in this situation get financed? Obviously, selling off chunks of the business / company is the way to go, but how is the value determined?

Have you thought about approaching Enterprise Ireland or the IDA with your idea ... they may provide start up capital!

Marathon_Man

Dragons' Den??

http://www.bbc.co.uk/dragonsden/apply.shtml

macfhi

DubTony wrote:

I have an idea that needs financing. Banks won't touch it with a 40 foot pole as there are no tangible assets. How does a startup in this situation get financed? Obviously, selling off chunks of the business / company is the way to go, but how is the value determined?

The best form of financing is where you don't give away a chunk of your company. To start with, as long as the idea is exportable, you should look for a feasability grant from Enterprise Ireland. You can then use the grant offer to get a bridging loan from a bank.
The longer you can bootstrap a company the more likely you are to prove the concept and raise funding.
Vauations on pre-revenue companies are very subjective and formulas just don't work because there are too many unknown variables

Slinky>

Banks are very cagey with start ups, A guy I do some work for was buying a taxi and a plate, he needed a loan for 50% of this as he had the rest in savings, the bank decided they wanted cash flow projections which we provided, they were quite strong as the car would be on the road a lot yet the bank declined the loan.

he applied for a 'home improvements' personal loan (unsecured) sometime later and was approved within hours.;)