Figuring out exact values of businesses can be extremely difficult if not impossible. Where a company will grow to, and the various values that you can offer to an entrepreneur for a share in their company can vary so it is a tough spectrum to navigate. Winning angels have theories or systems that they enjoy using, and there were some that stood out to me.
For me, at this point, cash is not a major opportunity for me to invest into a company. My wife and I have some, however the amount necessary to really launch a business on a grand scale is limited so I cannot value a business in that aspect. Time and sweat, however, are premises I can.
Small businesses are usually not exactly what most angel investors are looking for because they want something scalable and can grow, however as I read this book I am making an attempt to apply it where I am at currently. This idea grows into me doing smaller investment by actually finding people who want to start or have their own small business, such as photographers, house repairmen, or even lawncare services. Not charging them based on my work, but taking a certain percentage of their profits at the ending period.
The reason these people come to my mind is that a lot of them are not really business men. They are skilled laborers. They have a specific set of abilities and typically are good at them, but lacking the business know how to really make it boom. Hiring a business consultant is usually out of their reach at the start, but I think that offering them the service for a certain percentage of their profits would be an interesting approach. If I could really help them build their business up and get a lot of work, while making them more efficient, then I could get them and myself more pay.
I would like to do this, and then as things grow, be able to invest in startups that are scalable. At my current state, this is how I could actually see myself investing. Valuing these businesses are much easier than valuing large businesses because it is much more simple to track the amount of work and the profit they incur from it. With my sweat equity in the business, I feel like 15% or so would be reasonable to ask as long as I can truly help the business owner out.
Valuing a business is a difficult process and from what I can tell, no one has it figured out but everyone has their own method and way based on where they are currently at. Taking time to figure out a way that you can be investing is what we all need to be doing to grow our wealth, because there is always some way for us to be growing.
- Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.