- How to Create a Business Plan to Acquire Investment Capital?
- Your plan needs to be concise and logical and give your investors what they need to know, so they can invest in your company today.
- Quick elevator speech for your Business Plan for a review in person or on the phone.
- What is your concept? Exactly, what is your idea? Bakery, Bicycles, Food, get to the point!
- How much investment capital do you need? See the valuation of a business below.
- When do I (investor) get my money back? How long?
- What is my ROI on my investment? You need to have a solid answer to this question.
- Do the work and background history support running the operations of your concept?
- Most investors want 51% ownership in case you get lost in your leadership role.
How do you calculate the valuation of a company?
What Is Market Capitalization?
Market capitalization refers to the total dollar market value of a company's outstanding shares of stock. Commonly referred to as "market cap," it's calculated by multiplying the total number of a company's outstanding shares by the current market price of one share. Market cap is used to determine a company's size, then evaluate the company's financial performance compared to other companies of various sizes.
An example, a company with 1 million shares outstanding (be precise) priced at $100 each would have a market cap of $100 million. The banking, angel investor, venture capitalist, or what you see discussed on "Shark Tank" on TV with the shark's figuring valuation of small companies uses this method to determine a company's size instead of sales or total asset figures. An investor uses the market cap to determine whether an investor sees a profit in the discussed investment.
The formula for market capitalization is: Market cap = share price x #s of shares outstanding.
Method I: Calculating Market Value Using Market Capitalization.
- Decide if market capitalization is the best valuation option. (there are other methods). Then, determine the company's current share price.
- Find the number of shares outstanding.
- To determine the market capitalization, multiply the total number of shares by the current stock price.
This next bit of information refers to outstanding shares being found and priced. Companies you considered or reviewed for a benchmarking valuation should be in the same industry and size and have similar sales/profits to the company you want to value. Also, the sales (of comparable companies) should be recent, so they reflect more or less current market conditions.
Valuation research help:
The 2019 Business Reference Guide, now in its 29th edition, is the essential guide to pricing businesses with conventional rules of thumb and pricing information for over 600 types of companies. https://businessbrokeragepress.com/shop/books/2018-business-reference-guide/ CPAs can perform a CoreValue Non-Certified Business Valuation to Uncover Any Potential Red Flags to Support Succession Planning.
Method II: Discounted Cash Flow DCF Formula.
What is the DCF Formula Used For? Discounted Cash Flow. (DCF).
The DCF formula determines the value of a business or security. It represents the value an investor would be willing to pay for an investment, given a required rate of return on their investment (the discount rate).
Examples of Uses for the DCF Formula:
- To value an entire business.
- To value a project or investment within a company.
- To value a bond.
- To value shares in a company.
- To value an income-producing property.
- To value the benefit of a cost-saving initiative at a company. Finally, too value anything that produces (or has an impact on) cash flow.
What is the Discounted Cash Flow DCF Formula?
The discounted cash flow (DCF) formula is equal to the sum of the cash flow in each Period divided by one plus the discount rate (WACC) raised to the power of the period number.
Here is the DCF formula:
- Where:
- CF = Cash Flow in the Period.
- R = the interest rate or discount rate.
- N = the period number.
Analyzing the Components of the Formula.
1. Cash Flow (CF).
Cash Flow (CF) represents the net cash payments an investor receives in a given period for owning given security (bonds, shares, etc.) When building a company's financial model, the CF is known as unlevered free cash flow. So, for example, the CF would be interest and principal payments when valuing a bond.
To learn more about the various types of cash flow, please read CFI's cash flow guide.
2. Discount Rate (R).
The discount rate is typically a firm's Weighted Average Cost of Capital (WACC) for business valuation purposes. Investors use WACC because it represents the required rate of return that investors expect from investing in the company. For example, for a bond, the discount rate would equal the interest rate on the security.
3. Period Number (N).
Each cash flow is associated with a time period. Common time periods are years, quarters, or months. The time periods may be equal, or they may be different. If they're different, they're expressed as a year's percentage. What Does the Discounted Cash Flow Formula Tell You? When assessing a potential investment, it's essential to consider the time value of money or the required rate of return you expect to receive.
The DCF formula considers how much you expect to earn, and the resulting value is how much you would be willing to pay for something to receive precisely that rate of return. If you pay less than the DCF value, your rate of return will be higher than the discount rate. If you pay more than the DCF value, your rate of return will be lower than the discount.
MBA formula: If revenue outweighs the cost, take the deal, and if it is, the reverse cost outweighs revenue, pass on the deal. That's what the Sharks are doing on TV with potential businesses to invest in, Small Business Owners always overvalue their company as sweat equity with the personal loss of finances included in their valuation.
Please look at one of my past business plans(Discount City) templates as an example of how to write a business plan for review.
