Valuing a start-up for investment purposes

DubTony

I've an idea that needs about 60K to get off the ground.

I expect that first years turnover will be about €400,000 with a gross profit of about €50,000. I'd expect a net profit of about €25K based on these figures. While this may seem like a ridiculously high profit figure, for what I have planned it's very realistic. This will be explained in the business plan.

So, if you were investing €60,000 in this business (after seeing how this profit is possible), what equity would you expect?

I wouldn't say thats ridiculously high by any means Tony. Just going by the figures they wouldn't get me excited too much so I would figure your investor would be a more conservative type.

I expect you probably want to give away about 20% of the company for that?

Investor would most likely want more, if thats the case I suggest you offer 50% sliding down to 20% after the initial investment has been paid back. That way you get to keep control if the company is a success. If its not a success and the company cant pay back the investment at least then the investor can change things up a bit.

cerebus

If you want to get a feel for how a typical institutional investor would value your enterprise a quick google search will give you an introduction to some common methods.

Your prospective investor could discount your projected cash flows using his weighted cost of capital, for example. The investor could also just blow your cash flow projections away and use his own analysis of the market and estimates of your traction/penetration rates.

Alternatively, some comparative analysis with similar public or private companies could be used to come to a valuation.

Finally, it might be as simple as the investor wanting to invest X euros, and wanting to own Y% of your firm in return, so the valuation becomes whatever it needs to be to reach the required model ratios.

Hope that helps (disclaimer: I have worked in VC, your prospective investor may use different metrics. If you are looking for money from an angel-style investor then they may not use any metrics at all and it might just be based on how much they like you/your idea.)

DubTony

Deleted User wrote: »

I wouldn't say thats ridiculously high by any means Tony.

Yeah, I guess I'm not comparing like with like. I'm constantly referring to my previous business selling smokes and sweets to kids and hoping for a 2% profit at the end of the day.


OK, lads. Thanks for those replies.

Lplated

How much are you putting in?

You say it needs 60k to go and you wonder how much % investor would need to come up with the 60k - so you're looking for 100% finance?

Obvivously your projected t/o and profit figures would be torn to shreds, based on decades of reliable data of entrepreneurs seriuously overestimating t/o and underestimating costs.

Also of interest would be your background in this industry and how likely you are to be able to pull it off.

Taking your figures at best, using 5 times profits to value the business - 5 by 25k = 125k, my 60k worth about 50%.

Problem i see is that 1) it doesn't like your putting up much, 2) overall size looks too small for a worthwhile punt and 3) i think my 60k is really worth about 80% of your equity, but if i look for that much there is no incentive for you to achieve.

Best of luck anyway.

Sposs

As the others have said you really need to invest some of your own money if you want to be taken seriously , if you can get the 60k yourself and grow the buiness to it's projected 400k turnover your then in a far stronger position to take on investment for the next stage of growth.

DubTony

Lplated wrote: »

How much are you putting in?

You say it needs 60k to go and you wonder how much % investor would need to come up with the 60k - so you're looking for 100% finance?

Sorry. My bad. It needs about another 60K to go. I won't go into how much I'm investing if you don't mind. I'm really just trying to get an idea of what equity an investor would want based on the figures. My own equity figures are really just guesswork based on what I think I'd want myself.

Obvivously your projected t/o and profit figures would be torn to shreds, based on decades of reliable data of entrepreneurs seriuously overestimating t/o and underestimating costs.

I think even the toughest "Dragon" would find it difficult to pull these figures down. In fact it's quite possible that the reaction would be the opposite. Whether that's good or bad is another thing.

Taking your figures at best, using 5 times profits to value the business - 5 by 25k = 125k, my 60k worth about 50%.

I'd a figure of 50% myself. Most of the 60K is actually needed to cover stock. They're high priced high margin goods. If the project went belly-up, it would do so with a tremendous retail value on the remaining stock. Plenty to give huge discounts when needed to move the goods on and easily cover any investment.

Problem i see is that 1) it doesn't like your putting up much, 2) overall size looks too small for a worthwhile punt and 3) i think my 60k is really worth about 80% of your equity, but if i look for that much there is no incentive for you to achieve.

Good point. However I did state that we're looking at FIRST years turnover. I would expect year 2 to be significantly higher but the company's cost base would remain fairly stagnant. (I'm a cost watching / cutting machine )

Best of luck anyway.

Thank you.

antoinolachtnai

If the costs are mainly stock, and the stock is non-perishable, is there no way you can get the supplier to finance you?

60k for a bit of stock to get going when you are going to turn 400 for the year doesn't sound like all that much to me.

DubTony

Interesting idea. That's worth looking at. Thanks.

rabbit Stew

Hi Dubtony,
Firstly well done for looking in to this and getting some opinions.
A lot of people don't do enough research before starting something up and as a result it can all end in tears.
To get a better idea of waht your talking about I have a few small questions.
1) Will the business have assets other than stock (ie premises vehicles etc.)
2) You have given projections for year one. What do you see the business doing in years 2 & 3?
3) If Gross profit is €50k and Nett is €25k where is the difference going?
4) If the investor has a 50% share of profits how many years will it take for them to recoup their initial investment?

Obviously an investor will need a lot more information than what you've given us here and without that info you'll only get "best guess" figures.