10 Rules for Valuation

10 Rules for Valuationby TIM BERRY on DECEMBER 7, 2007 in BUSINESS PLANNING,PLANNING FUNDAMENTALS,VENTURE CAPITAL Read more: http://timberry.bplans.com/2007/12/10-rules-for-va.html#ixzz1HdGebFFc

I really don’t like the word “valuation”; it sounds too much like an MBA buzzword. But I like even less the general confusion about the concept. We talk about starting businesses, we talk about running businesses, getting investment, getting financed, and we should take discussion of valuation for granted. Valuation is at the same time frequently necessary, obvious and extremely arcane. It is nothing more than what a company is worth. It becomes necessary more often than you’d realize, with buy-sell agreements and tax implications after death and divorce, plus financing and investment. It’s obvious because a business is worth what a buyer will pay for it. And then it breaks down into complex formulas and negotiations.

So here are 10 (I hope simple) rules for valuation.

  1. 1. Valuation is what a company is worth. It’s like what a house or a car is worth–less than the seller says, more than the buyer says.
  2. 2. A company’s ownership is almost always divided into shares. Let’s say your company has 100 shares, 51 yours and 49 your co-owner’s.Valuation
  3. 3. Valuation equals shares outstanding times the price of one share. If the company is worth $500,000 and there are 100 shares, then each share is worth $5,000. (OK, there are exceptions, preferred shares and such, but leave the fine tuning for later.)

4 ….
Read more: http://timberry.bplans.com/2007/12/10-rules-for-va.html#ixzz1HdGPVUAT