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Business Estimation

Financing of the companies which are at a stage of expansion, like for example, already existing companies and functioning business demands calculation of their cost. Two basic valuation methods of original cost of the company (pre-money evaluation) used for this purpose. The first one is based on an asset valuation or net assets. The second based on the size of an annual turnover or sales volume (turnover or sales).

Original cost calculation is necessary for determination of structure of the transaction (deal structure). Considering that in overwhelming majority of cases, at primary investment the venture capitalist applies for shares block less than the control stake and volume of given investments should be proportional to a provisional estimate of cost of the company. If, for example, the initial agreed value of the company constitutes $1,500,000, volume of necessary investments should be $500.000 and the investor acquires 25 %-s’ shares block, hence, cost of the company after investments will constitute $2.000.000 (post-money evaluation).

Other shareholders should in this case should bring $1.500.000 or in the form of those or others material or intangible assets or in the form of money funds. Then the total capital of all participants of the transaction will constitute the necessary sum of $2.000.000.

However, in this case validity of small scale business needs essential amendments. At the overwhelming majority of the small and average companies the size of equity is purely nominal size seldom exceeding a minimum established by the legislation. For example, if authorized capital of any Joint-Stock Company equals about $2.600 then a question arises of how the company will reflect in the accounting records of $500.000 of investments into authorized capital?

Or this company should increase authorized capital till the necessary size ($2.000.000) at the expense of actual monetary installments of shareholders ($1.500.000 a minus of $2.600), or to overestimate the assets so that the revaluation sum equaled to a difference between residual book value of assets and the new sum of stockholder equity.

Both the first and the second variants appear to be very complicated in realization. The first is because shareholders – the organizations and private persons have no sufficient sums of cash and if they have, frequently it will be difficult to explain a source of their origin. The second is because work on an asset revaluation (if they are available in sufficient volume) is rather expensive. Small and the moderate-sized firms testing an acute shortage of cash and are not always in a condition to afford such expenditure.

From here the most widespread scheme of entering of investments into the small and average companies, practiced among investment venture capital trusts is the following. Stockholder equity increases to reasonable size. It is allocated between shareholders according to the reached arrangements. Then packet cost in 25 % of the venture investor will constitute $4.300 which is brought in the form of direct investments.

The Rest – $495.700 is given in the form of an investment credit, for a period of 5 – 7 years or with the interest rate exceeding LIBOR on 2-4 % (that constitutes today approximately 8-10 % annually). Subsequently this credit can be converted in the share or the bond with simultaneous additional issue. The basic part of investments is thus reflected in the financial reporting as company long-term obligations. If these means were given in the form of bank loan, the company would be obliged to give to bank liquid pledge in cost not less than $720.000 – $830.000. Additional advantage of this scheme is as well that it allows to make essential saving.

It is very crucial that government, despite this recession is not leaving to help small businesses. And small business grants can be a real helper right now.

But, of course, you should understand that today the fight for small business grants as well as for other kinds of grants has become more fierce. This is logical – more businesses need them. So before you start your fight for the small business grants, please make sure to visit this blog for more
details about grant industry.

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