|Calculating value of a site business for equity?|
I'm still working on a business plan I started last September for a new website. I've been working with volunteer advisors from SCORE, as this is a more ambitious project than I've undertaken before. The last counselor I met with really likes the plan, and wants me to present my plan before a group of angel investors. Before I do so, he suggested I make some changes to the plan.
One thing he suggested changing was the payout to the investors. I had structured the investment as debt, with repayment in one year paying 50% interest, or repayment in two years paying 100% interest, or repayment in three years paying 200% interest.
The advisor told me that angel investors typically want the payout structured as equity, and are looking to make 1000% over a period of five years, or some portion of that return over a shorter period of time in the form of converting some equity to cash.
I'm not very familiar with figuring out valuations for a business for such purposes, and so I'm in the dark. I'm working backwards, trying to reach the 1000% figure using my projected pre-tax profits.
So, if I have $5 million in pre-tax, pre-amortization, pre-depreciation profits in the 5th year (just throwing out this number as an example), and the investors had put up $100,000 to begin with, then they would expect to get $1,000,000. That would be 20% of the company if the value of the company was a multiple of one, correct?
But it's my understanding that the value of a company is usually 3-6 times earnings, so the investors' shares should be less than 20%, right?
I'm sure the advisor can help me with this, but I figure the less I look like an idiot to him, the better.
Any advice much appreciated.
The multiplier will be something specific to your sector, not 3-6 x t/o, 3 at best for your business, if you dont know the multiplier you need to get someone with expertise in your sector on board.
The overall value will be heavily descreased now because we are not in a period of economic growth, so the likelyhood of a good/fast return is lower.
The VC deals I have been involved in normally want 51%, especially if its a web based model, & especially in this climate. If you have planned for debt, not loss of equity the first decision yoiu need to make is how much equity are you prepared to give up to make it happen.