Business Valuations

Valuations and finding an investor are the most talked about areas for entrepreneurs and their startup businesses because it’s a common way to start a new venture if you don’t have enough of your own money. There are many ways to value a business and they are based on:

• The cost of getting to the starting point
• The revenue (cashflow) that the business generates
• The potential for future incomg (usually involved with patents)
• The net profit of the business

The cost price is easy to work out and the net profit is also relatively easy to work out. If you take a look at the value of publicly listed companies you’ll find that their valuation is measured (in part) as a multiple of their price to earnings (the Price to Earnings or PE ratio).

Valuation also depends on whether there are similar examples or how much demand there is in the market for what your business does. This subject of our course is NEW so watch out for blog posts and articles initially that cover this important topic.

Raising Capital

There are several ways to raise capital for your business, but essentially they fall into two categories:

• Debt (borrowing money), and
• Equity (selling a share of ownership)

Debt needs to be repaid and the cost of debt varies with the interest rate being offered and available to you. When borrowing money the lender will assess the risk associated with the business and the higher the risk the higher the interest rate.

When you sell Equity in a business it can be a simple case of selling ordinary shares, but there are many other interesting ways of selling equity that are not so ordinary. The most visible in the Australian share market are News Corporation Preference Shares. Equity involves not only a share of the business rewards, but also the potential to participate in the decision making process.

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