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by
Venture Planning Associates
There are seven methods to
value a business as approved by the IRS. With the advent of the Internet other
methods have also been developed to assist with these special types of business.
If you business is exclusively and Internet business
click here. For standard of mixed
business type use these guidelines.
Reasons to value a business
Information required
(maximum number of
years possible)
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Seven Valuation Types
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Adjusted Net Assets
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Capitalization of Earnings
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Dividend Paying Capacity
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Excess Earnings: Return on Assets
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Excess Earnings: Return on Sales
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Discounted Cash Flow
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Discounted Future Earnings
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Combination Method Weighted Average of All Types
Conventional Valuation with
Variations and Averaging
Generally,
Venture Planning Associates
offer programs that give the total business value, however it may be
possible to value a portion of the stock, to add a discount or premium to
stock as well.
For an example of a conventional venture capital valuation with variations
see the chart below. |
| Valuation Calculation
|
Notes |
Best Case |
Worst Case |
Expected Case
|
| Base Year Revenue
|
User input |
$500,000 |
$500,000 |
$240,000 |
| Annual Growth %
|
User Input |
40% |
10% |
20% |
| Ending Year Revenue
|
Calculated |
$3,500,000 |
$1,440,000 |
$2,750,000 |
| Years to Harvest
|
User Input |
5 |
5 |
5 |
| Target Year Revenue
|
Calculated |
$3,500,000 |
$1,440,000 |
$2,750,000 |
| After Tax Profit %
|
User Input |
50% |
10% |
30% |
| Target Year Profit
|
Calculated |
$1,750,000 |
$275.000 |
$432,000 |
| Price/Earnings Multiple
|
User Input |
12 |
12 |
12 |
| Future Value of Venture
|
Calculated |
$21,000,000 |
$3,300,000 |
$5,184,000 |
| Required Annual Return %
|
Lookup * |
51.6% |
51.6% |
51.6% |
| Present Value Factor
|
Lookup * |
0.132 |
0.132 |
0.0132 |
| Discounted Present Value
|
Calculated |
$2,772,000 |
$435,600 |
$684,288 |
| Required Equity Investment
|
User Input |
$250,000 |
$250,000 |
$250,000 |
| Equity Sold/Purchased
|
Calculated |
9.02% |
57.39% |
36.53% |
| Probability by Case
|
User Input |
10% |
50% |
40% |
| Wtd. Ave of Scenarios
|
Calculated |
percentage stock to be sold = 44% |
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* NPV and P/E ratios from data bank
sources for your business type
First Chicago Method
The First Chicago
Method is used to value venture type businesses by Venture Capital firms.
High risk ventures are
usually valued using the First Chicago Method that evaluates probabilities of
success (IPO), the sideways scenario, and the failure scenario (liquidation).
This method uses a
high- risk adjusted, discount rate and embodies many assumptions.
We specialize in the
First Chicago Method as a means of determining the pre and post investment
values for entrepreneurial (pre-IPO) business investments.
Valuation Services
Venture Planning Associates
provides valuations for any of the above listed IRS scenarios.
Venture Planning Associates
also provides valuations of sole proprietorships, partnerships, or corporations
with one class of stock, and provides comparisons with industry standards
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