How do you calculate or determine what your business is worth to an investor?
Opinions expressed by Entrepreneur contributors are their own.Calculating the value of a startup or early-stage company with limited sales and profits is always an arm wrestle between the entrepreneur and the investor. Unlike a public company with a share price set by the market or a mature private company with a track record of profitability, the only way to put a price tag on a company like yours is to show the investor your company's potential for growth and the likelihood for sale to a strategic buyer--the so-called "exit strategy." Since most investors look for a return of 5 to 10 times their money, an investor who put $1 million into company would be looking to pull out $5 million to $10 million (usually after an acquisition or IPO) after 5 to 7 years. You'll need a clear and compelling business plan with three to five years of financial projections to successfully make your case. FYI, professional investors typically buy one third (33 percent) of the company's shares in the first round of financing, so, if you're looking for $1 million, you'll need to demonstrate that your company is worth $2 million on a pre-money basis (that is, before the investor puts his money in).