Based on the following data, determine a “reasonable” valuation that YOU as an i

Question

Based on the following data, determine a “reasonable” valuation that YOU as an investor would place on a company in issuing a term sheet to make an investment in that company. Note that all amounts stated in the assumptions, except for estimated revenues that are based on the financial projections for your company, are based on comparables for similar companies which are operating in the same industry.

(1) Estimated revenues in year 5 (assumed exit year) - $25 million
(2) After tax earnings in the year of exit are estimated at 12% of revenues, or $3 million.
(3) PE ratio in the year of exit is 20X
(4) Exit values approximate 2X of revenues in the exit year
(5) The investor’s desired IRR yield based on the Wiltbank Study is 20X.

Question 1

Assuming you are investing $750,000, what average exit value did you assume in your valuation project? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 2

Assuming you are investing $750,000, what post-money value did you assume? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 3

Assuming you are investing $750,000, what pre-money value did you place on the company? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 4

Assuming you are investing $750,000, what post-money ownership percentage do you end up with after making the investment? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 5

Assuming you are investing $750,000, what post-money ownership percentage do the founders/ owners end up with? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Explanation / Answer

Question 1)

Estimated revenues in year 5 (assumed exit year) - $25 million After tax earnings (based on industry comps) = 15% of revenues, or $3.75M. PE ratio is 15X or $56.25M exit value. Software companies sell at 2X revenues, thus exit value = $25M ×2, or $50M. Average exit values: ($56.25M + $50M) ÷2 = $53.125M. The average exit value is independent of the amount of money invested by the investor. Instead it depends upon the revenues and earnings in the future, in 5-8 years of time.

Question 2)

Assume investment of $750K. Post-money = exit value ÷ROI yields or $2.656M ($53.125M ÷20X) Consistent with ‘typical’ deals. Investors expect a 27% IRR in six years (WiltbankStudy). This equates to 10-30X, depending on actual experience.

Question 3)

Pre-money = Post-money –Investment or $1.906M ($2.656M -$0.75M). It is simply the difference between the post money and the investment by the investor. Of course the post money valuation will be greater than the invested amount. A pre-money valuation referring to the valuation of a company or asset prior to an investment or financing. If an investment adds cash to a company, the company will have different valuations before and after the investment.

Question 4)

Post-money: Investor owns 28.23% ($0.75M ÷$2.656M). The amount that an investor will own would be the percentage of the amount invested by him in terms of the average exit valuation of the company. In this case the investor would own 28.23% of the total post money.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.