value a company

Start up businesses – how do you value them when you are looking for equity?

There are many ways to value a company. Some people use a multiple of normalized earnings. There are different multiples for different types of businesses and different locations of businesses. A business may have a higher multiple in a big city vs a town.

The multiple also changes depending on what part of the country you are located in. Some investors use discounted cash flow, others look at liquidation of the assets if real estate is involved. There are many different ways to value a business but none are applicable to a start up company.

You have a start up business which needs money to get to the next stage. Unfortunately, this is the most expensive type of financing because this stage of financing is very risky. The investor may not get his money back, there is no guarantee that the venture will be successful and there may be no liquidation value in the assets of the company if it does not succeed. Since this is risky, investors are looking for large returns. A person who will invest in this stage of business may be called an angel investor or venture capitalist.

They are typically looking for a 25% ROI. They play the numbers game, for every 10 investments they do, 8 will fail and 2 will be a home run. The return on the 2 will more than compensate for the loss on the 8 bad ones.

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