One of the first basic capital decisions a business owner must make is to offer debt or equity participation to their investors.
When and entity is offering debt investors are actually lending funds to the business. This means no matter how well the business may or may not be doing at any given time there will most likely be some sort of required periodic payment that the business will have to pay the investors.
When offering equity participation the investors are becoming part owners in the business. This means they are willing to let the profitability of their investment be tied to the good and bad fortunes of the business. In this case of equity participation, when the business does well the investors reap a higher reward. During periods when the business does not fare so well the investors will receive less and in some cases no profits or distributions at all.
A very critical question for business owners in the case of equity financing is how much ownership in percentage terms are they willing to give to investors in exchange for the use of their funds. This can be very tricky and can later lead to many monumental disasters if not properly calculated. Please remember in order for the business owner to remain in control of the entity they must maintain at all times more than 50% ownership rights. This means during any transaction they can only give up so much ownership in
percentage terms before running into problems. Yet they must still raise enough money from equity investors to meet the capital needs of the business. The business owner must factor in now how potential subsequent equity transactions will affect their majority ownership rights. Remember if the business owner percentage ownership ever slips below 50% they run the risk of losing control of the entity.
These are the circumstances that create the need for a formal Equity Valuation. This valuation will give the business owner a gauge as to how much ownership in the business will realistically need to be given up for certain amounts of capital under various circumstances. This will serve as a guide to the business owner during the preparation of the offering documents, during any negotiations with investors, and setting milestones for subsequent equity transactions.
Please remember the formal equity valuation helps to avoid many pit falls. One very critical pitfall is when the business owner gives up too much ownership in the entity for a certain amount of capital. A formal equity valuation is also a big help to the business owner keeping control of the entity while still meeting the capital needs of the business.
For those business owners who wish to make use of our Equity Valuation Services the first step would be to complete the questionnaire after clicking “Client Intake Request” tab.
Once the questionnaire is completely filled out our staff can make a complete assessment. Afterwards we can provide the business owner a detailed breakdown of the cost and time that will be required to fully prepare an equity valuation that will outline an optimal amount of funding given certain equity ownership percentages. Our company bills $225.00 per hour for equity valuation services.
It usually takes our staff 3 to 4 business days to prepare a time and cost proposal for an Equity Valuation. Clients should allow this time for us to conduct our assessment.