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How do Venture Capitalists Value your Business?

Venture capitalists will conduct a through and extensive investigation into possible investment opportunities. This investigation is known as due diligence. If this investigation is done accurately and thoroughly this will give the potential investor the information to correctly value a possible business investment and avoid costly mistakes. Potential investors will be looking at the possible value of any business opportunity from many angles. Obviously the investor will want to know what the business opportunity is worth before investing but many investors are presented with numerous opportunities for investment. A speedy due diligence process will allow the venture capitalist to choose the most potentially profitable investments to capitalize on. The correct valuation of a business also allows the venture capitalist to construct the correct and most profitable offer terms, review counter-offers and negotiate the most successful deal. A successful valuation from due diligence also helps keep the potential venture capitalists or investor from the mistake of under capitalization that limits an investments potential.

There are many tools available to help potential venture capitalist value a prospective business but many basic rules apply. Most Venture Capitalist or investors will begin a valuation by checking the business price against real estate market data. This is an easy way to determine as to whether the business is priced correctly for the prevailing market. Many Venture Capitalists will have lists of promising acquisition targets that can be easily identified within the real estate market. Should the potential business be deemed appropriately priced then the Venture Capitalist will move onto to a more detailed look into the business. This is known as a business due diligence. This is done to insure that the company is truly as profitable as it appears from the outside. Venture Capitalist will determine a much more detailed balance sheet than just profit and loss. The business due diligence will include profitability of all marketed products of the company. They will also include a background check on all key management figures within the company. This is done to determine the amount of "good will" a prospective business has within its management ranks. In addition Venture Capitalist generally examine a businesses management structure to determine if the business is "top-heavy". This is done since historically those in management positions generally make more money and cost more as employees to keep. Potential investors are very interested in whether there is too much spending in payroll. Many potential investors will even want to talk to key customers to determine customer satisfaction. This is even given a dollar amount and factored into a businesses overall worth and growth potential. Venture Capitalists will also factor into the business worth the amount of key competition at all market levels. This helps determine the overall marketability of any products the company may offer. In addition all financial projections are factored into a business overall worth if they are determined to be accurate and historical.

Venture capitalists will also want to have their lawyers conduct a legal due diligence. A prospective company should expect to receive a due diligence checklist from the venture capitalists' attorneys, requesting significant and detailed information about the company. This is done to insure that the business does not carry any current or possible future legal problems that could limit the businesses worth or potential worth. Obviously the business that does not have legal entanglements or can limit the possibility
of such will be worth more to a possible investor who does not have to worry about costly legal fees, time spent in court and possible damages.
After examining all of these above discussed documents and determining profit or loss factors the Venture capitalists will be able to determine the worth of any possible business investment.

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