How to Calculate Post-Money Valuation of a Private Limited Company



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Calculating the overall value of a private limited company may seem like a difficult task at first. An enterprise's value is determined by looking at a number of different factors. This goes beyond looking at debt, current market value and cash on hand. Use this brief guide to learn about all of the factors that make up post-money valuation.

How to Calculate It

Post-money valuation, also known as Enterprise Value (EV), represents a company's true economic worth. That is, the minimum amount a buyer would have to pay for the whole business.

Cashing out Enterprise Value
Calculating post-money valuation

It's an important number to consider when you're valuing a stock, or intend to sell your business.

Most of the numbers you will need to calculate the value of your company can be found in your past financial statements. If you already have a balance sheet written out, most of the information can be found on there. The only thing you would still need to have an understanding of is the current market value (market cap).

You may be aware that market capitalization (i.e., current stock price multiplied by the number of shares outstanding) also serves as a company's price tag. But the problem is that market cap ignores debt. And with many cases, debt is substantial enough to change the picture completely.

Related: How to Sell a Business With Debt

To calculate enterprise value, you will start with the market cap, then add debt (long-term debt + short-term debt), and subtract cash and investments.

Here is the formula used to calculate Enterprise Value:

EV = Market Capitalization + Debt - Cash and Equivalents

Keep in mind that cash also includes your business's liquid assets. Anything that you could sell to get cash quickly, such as stocks or gold bars, can be included as "cash". Property and other assets may be included here as well, but only at their current market value. For example, if your private limited company owned a building that cost $500,000, but could only be sold for $100,000 (in short time), only $100,000 would be included in this equation.

As you see, enterprise value aggregates more factors than just the value of a company's outstanding equity. To acquire a business, a buyer would have to assume to take over the company's debt, though it would also receive all of the company's cash. Taking over the debt certainly increases the cost to buy the business; but from the other hand, acquiring the cash and equivalents reduces the cost of buying the company.

Debt and cash can have strong impact on a company's enterprise value. Two companies with equal market capitalization may possess different enterprise values. For example, a business with a $100 million market cap, no debt, and $20 million in cash would be cheaper to acquire than the same $100 million company with $30 million of debt and no cash.

Keep in mind that while you may have your financial statements regularly available, you cannot trust a self-evaluation. The market is always changing, which can in turn, change the value of your company. To get the most accurate post-money valuation, you may need the help of a professional.

The key to getting an accurate valuation is knowledge. You need to have a good understanding of current market value and how they affect your assets. Most entrepreneurs tend to overestimate this amount, which can lead to many problems later.

If you are confident that your balance sheet is accurate, use that data, but present it to a professional to analyze. If your company is undergoing a large change or you have been doing this step yourself, you may want to hire a third party adviser to help you assess your financial data. This reduces errors and gives you a more accurate valuation.

You should also have regular audits performed. This will help you ensure that the valuation you have is always correct, giving you a better understanding of your business potential. If you are getting post-money valuations because you intend to sell your company, working with a third party for audits and a valuation amount is required.

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