08.08.00 LMKs method step 7 Investor valuation

Selling shares to finance the company startup

• Now come a most critical question: Can we finance the company by selling shares without loosing control?

• It is often accepted that the GeneralManager should retain 2/3 of the company in the first round of financing.

• Will the company generate so much profit that 1/3 is enough to give enough return to the investor putting up the capital needed?

• Let’s have a look on our case

08.08.00 LMKs method step 7 Investor valuation

Return for investorAccumulated loss 0 580 1 354 1 354 1 354 1 354Sum Assets 0 756 1 718 2 071 2 496 2 886

0 0 0 0 0 0 0Liabilities 0 0 0 0 0 0Short term bank loan, percent. of sales after 3yrs 0,05 0 0 0 270 377short term misch.tax credit 0 50 100 150 200 300Accounts payable, fixed costs, days 30 58 121 178 245 306Accounts payable, product production costs,days 30 3 12 37 74 99Sum short term liabilities 0 111 233 365 789 1 082

0 0 0 0 0 0 0Long term risk loan from Aunt Maggie 0 100 100 100 100 100Accumulated profit 0 0 0 5 1 588 4 254

0 0 0 0 0 0 0Capital needed, accumulated 0 545 1 385 1 600 19 -2 551

Profit before tax 0 -580 -774 5 1 583 2 667

Imaginary interest on capital needed, percent. 25 % 136 346 400 400 400Accumulated 136 482 883 1 283 1 683

1/3 of profit 0 0 2 528 889will cover a principal of xx, at rate 25 % 0 0 7 2 110 3 555

08.08.00 LMKs method step 7 Investor valuation

Many ways to look at a company

• In our case we see that the investor after year 4 has put something less than 3 mill into the company, including the missing 25% interest.

• In year5 (and we presume the following years) 1/3 of the profit (we disregard the tax here) will provide interest at 25% pa for more than 3 mill.

• So investor can get aprox 25% on his investment.( if plan is as solid as The Federal Reserve)

• Is this enough??

• Investor may be looking for 10x input in 3 years !

08.08.00 LMKs method step 7 Investor valuation

Value of our caseProfit before tax 0 -580 -774 5 1 583 2 667

• We can calculate the value of this money stream, assuming the last year to continue indefinitely, or a fixed number of years, with a given rate of return

• Or we can calculate the value based on P/E=4 (25% pa profit)

• According to this the company is worth 10,7 mill which is far from the investors dream of 1,6x3x10=48 mill.

• Does the investor believe in the GeneralManager’s capabilities for building a profitable business?

08.08.00 LMKs method step 7 Investor valuation

Completed plan: Change “Capital needed” to “Common stock” and “Additional paid in capital”, as

well as fill in “Extra cash”• This plan would be

regarded as marginal.

• Too low sums for professional investors

• Not high enough growth potential

• Try again!