Re: Pre-money vs. Post-money valuation

There are a few considerations here. To answer your question:

The owner's asking price doesn't set the value for the company - unless, of
course, you pay that price. There are several methods of determining the
value of a company, including factors such as revenue, retained earnings,
assets, and various combinations of these. Go to Google and search for
BizPricer, and you'll see one of the best valuation tools I've found.

To answer questions you didn't ask:

Has a CPA prepared the financial reports you've been shown? Is that same CPA
willing to give you an opinion as to the value of the company?

Why is the owner selling?

Why would the old owner, who no longer has control, re-invest $300,000 in
the business - and in what form? I could see his loaning you half of the
money back as working capital, and through the loan terms making more money
on the deal.

The dynamics of assuming control of a business with the former owner still
involved can be "interesting." What is the new owner's role to be? Active?
Passive? It's also interesting that the owner apparently doesn't want to
cash out, but instead wants to retain an interest. Will he be having trouble
letting go and letting you run the place?

-- 
Barry Stevens
Venture Capital, Venture Services
[EMAIL PROTECTED]



"RDS" <[EMAIL PROTECTED]> wrote in message
news:[EMAIL PROTECTED]
>
> I am considering purchasing an ownership position in a small
> manufacturing company and I would like to know how to value the
> company based on the following:
>
> a) Owner asking price: $1,000,000
> b) Purchase 60% share: $600,000
> c) Owner will pocket $300,000 and re-invest $300,000 as working
> capital.
>
> Based on this data, does the fact that the owner plans to
>
> 1) take money out of the company change the valuation of the company?
> 2) re-invest money into the company change the valuation?
>
> I'm confused.  Thanks for your help.
>
> RDS