There are many ways to valuate your business. One recommended way is to create a Stabilized Operating Income Statement. An Income Statement consists of Revenues, Costs of Goods Sold (COGS) and Expenses. Normally an Income Statement reflects a year broken down into months, however a Stabilized Operating Income Statement shows only one column of information which should reflect a year’s worth of income.
The way you choose your revenues, cogs and expenses is by taking your income statement from your current year and past year and finding averages. You want to show a true representation of where your company stands. It is very important to be modest with projections while still showing a positive net operating income.
For an example we will use a hotel. The hotel’s revenues include room fees, food and beverages and phone bills. Let’s say 2 years ago the hotel made $300,000 from room fees and this past year the hotel made $500,000 from room fees. The revenues projected from room fees can be the average of $400,000. However, let’s say this is not an accurate number because sales have been going very high. Then the valuation can put a higher weight on the past year’s revenues or vice versa. (0.6*$500,000 + 0.4*$300,000 = $420,000)
You should make sure to list your revenues individually in order to show the investors all of the products or services you offer. The same with COGS and expenses.
Once you have completed the column resulting in your Net Operating Income, you can add an additional column which states the % of Total Revenue. This will show your investor 2 things. The first is the weight of all of your revenues. This shows which services or products are most profitable. The second is how much of revenues are going to expenses. You receive this number by dividing the individual revenue/COG/expense by the total revenues.
Instead of putting the % of Total Revenue, you can do the same with % of Gross Profit or % of Net Operating Income.
With regards to how much you should give up to an investor, it is important to maintain a controlling amount of 51% or more. It is hard to answer this without knowing the specifics of the company and/or the investor, however it is not recommended to give up more than 20% of the Company.
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