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Why should you care about valuation of a company when investing?

Why should you care about valuation of a company when investing?

Why should you care about valuation of a company when investing? 150 150 Jiang Hong Wilkin Business Law

Some client told me that they would like to invest in a private company and acquire 50% of shares of the company. I would ask how much they will pay for the 50% of shares, 1 million dollars or half million dollars? It depends on the valuation of the company. If the client paid 1 million dollars to get 50% shares of a company, it means the company was valued at 2 million dollars after the investment. If the client paid half million dollars to get 50% shares of a company, it means the company was valued at 1 million dollars after the investment. If we do not know the value of a company, there is no point talking about the percentage of shares. Therefore, the value of a company has to be determined before investing. How should we confirm the value of a company? We can hire a valuator. If the client would like to value the company by themselves, there are different approaches for different industries. For traditional industries, the net profit or EBITA will be referenced, usually 5 times of net profit or EBITA. For hi-tech companies, may be 10 or more times of net profit or EBITA. After the value of a company is confirmed, the client can decide how much should be invested for how many shares.

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