Valuation is a process that identifies the fair value of your business. How you arrive at that valuation, however, can differ depending on what method you use and what stage of growth your business is currently in. Understanding those nuances is important, particularly when it comes to pre-money and post-money valuations.
What is a Pre-Money Valuation?
A pre-money valuation measures a company’s worth before a financing round. This applies to startups that have yet to receive outside financing, as well as established businesses that are pursuing another round of financing. The term references the total value of the business, not the share price.
How is Pre-Money Valuation Determined?
Valuation considers a number of different factors based on which method is used. The value of a business may vary depending upon the particular approach that is employed. This is why it is essential that you partner with an experienced consultant who can identify the most advantageous valuation method for your business.
What is a Post-Money Valuation?
A post-money valuation refers to the value of the company after it receives funding. The value not only consists of the same factors used to determine the pre-money valuation, but it also includes the outside financing the business just received.
How is Post-Money Valuation Determined?
This process is more straightforward. Post-money valuation = pre-money valuation + value of cash raised. In other words, a business with a pre-money valuation of $5 million that received $1 million in cash is now be valued at $6 million.
Why it Matters
If money was raised via investments, not loans, the business valuation determines the equity share investors may collect when the financing round is over. It is important to identify whether the value of those shares is connected to a pre-money or post-money valuation. If a business receives $1 million in financing, understanding whether the per-share value is being calculated on a pre-money value of $5 million or a post-money value of $6 million matters.
Should a Business Calculate a Pre-money or Post-Money Valuation?
The short answer is “yes.” Both valuations are important to your business. They are used to create a more complete picture of the worth of your business at the end of the financing round.
Does This Matter for Pre-seed and Seed Round Companies?
Absolutely. In fact, for companies that are still in the idea stage, understanding the nuanced language of investing is especially important. Your business valuation is classified as a pre-money valuation if you haven’t secured investors yet. This means you can’t project your post-money valuation based on the total investment you’re seeking. Be clear about which term you’re using when you sit down at the table with potential investors.
Seek Professional Guidance
For many entrepreneurs, the decision to undergo a professional business valuation comes only when they are preparing to sell their companies. While having an accurate, detailed view of the value of your company is essential when contemplating your exit strategy, that same clear professional evaluation is critical when pursuing funding.
Savvy investors are going to want to understand how you arrived at your business valuation and whether it accurately reflects the true value of your business. If the valuation can’t stand up to this scrutiny, it could impact your ability to secure financing, or secure financing with optimal terms.
When preparing for a business valuation, it’s important to work with a firm that has a proven track record helping companies like yours. At Peek Advisory Group, our experts specialize in maximizing cash flow, managing rapid growth, and increasing the value of women-led businesses.
We offer three variations of business valuation depending on your goals. You can also get insights into the key areas noted above by completing this free assessment to see a snapshot of your company’s health. In five minutes or less, answer 15 questions and receive a 10+ page report on the areas in which your business excels and where it could be improved.