A company’s valuation is vital to the success of an M&A deal. Valuation is often subject to tricky negotiations between the company’s owners and potential buyers. However, these negotiations bring with them a long list of terms and vocabulary that one must get familiar with. Pre-money valuation and post-money valuation are common terms negotiators use during an M&A round. These are crucial to the bottom lines of both parties.
M&A valuation support from experts protects a company’s best interests at all stages of the deal.
An overview of pre-money and post-money valuation
Pre-money valuation refers to evaluating a company’s worth before investing in it. After finalising the terms and financing, the company’s value rises by the invested amount, resulting in a post-money valuation.
The pre-money valuation stage excludes the buyer’s investment. Simply put, it evaluates a company’s worth before it receives investment from the buyer. It gives an idea of the company’s current value along with the value of each share issued. Post-money valuation, on the other hand, refers to a company’s value after being acquired. Since merging or acquiring a company adds cash to its balance sheet, the post-money valuation is always higher than the pre-money valuation. The primary difference, therefore, is the timing of the valuation.
How to calculate a company’s pre-money and post-money valuation
M&A valuation support specialists calculate a company’s post-money valuation using one of these two ways:
- Add the invested amount to the company’s pre-money valuation
- Divide the new invested amount by the number of received shares and then multiply its per-share valuation by the number of total shares issued
A company’s pre-money valuation is before it receives any funding. Although a simple step, it requires calculating the post-money valuation before its pre-money valuation. The formula:
Pre-money valuation = Post-money valuation – Investment amount
The pre-money valuation depends on a combination of investor-driven metrics and formulae rather than on simple mathematics. Parties may use different methodologies to calculate a company’s pre-money valuation, often leading to heated negotiations. A number of factors are considered when calculating a pre-money valuation; they include exit-value calculations, comparable offerings, company performance and cashflow history.
Importance of calculating a company’s pre-money and post-money valuation
The calculations help determine the equity share a buyer must pay after the financing round. The difference could have significant financial and legal implications after the acquisition is completed.
