Ruskin Felix Consulting LLC partnered with a SaaS (Software as a service) company to prepare a comprehensive valuation report. The report highlights the financial viability of the project by laying emphasis on the valuation basics, valuation of the company – pre-operations, valuation of the company – post-operations, and re-evaluation of the company. To understand how financially viable the project is, we have highlighted the difference between VC and Angel valuation and the best practices to be followed for application of funds.
Information about the company:
- Type of Company – SaaS (Software as a service)
- Business of Company: Providing a Full-service Website builder (Semi-automated)
- Avg Charge per user per month: $20 per month
- No. of Shares: 10,000,000
- Value of 1 share: $0.00001
- Total Value of Company (Nominal Value) = $100
The Company being into the Technology industry will be valued separately for tax purposes and valuation of startup purposes. For accounting purposes, as per IAS 3, the company software will be valued as per the cost involved to build the asset and amortized/depreciated over the course of the usable life of the asset, after reducing any salvage value.
The software must be valued as per the term value of the asset. This will be the Net Present Value of all the Discounted Cash Flows that the company will generate over the course of its life. This term value is the present value of all future cash flows that will be generated from the company. Thus, for a startup, it will be very necessary that the management makes assumptions about the value generated from the sale of its services periodically and then discounts it with the internal cost of capital of the business. Even with no clients but a ready product, the company needs to be valued at the NPV (Net Present Value) of all future cash flows expected to arise from the Asset, considering a weighted risk factor to discount the asset further.
Normally allocation of Funds is done based on an ongoing understanding of expenses and operating costs. It is therefore an assessment that must be made by the company on a continuous basis. At an early stage the investment allocation are as follows: 40%-50% for research and development, 10%-20% for salaries, 0%-5% for bonuses, 10%-15% for HR expenses, 10%-15% for other software expense, 15%-20% for advertising and marketing expense, and 0%-5% for other expenses.
At a later stage the investment allocation are as follows: 15%-25% for research and development, 15%-25% for salaries, 5%-10% for bonuses, 10%-15% for HR expenses, 0%-5% for other software expense, 30%-40% for advertising and marketing expense, and 10%-15% for other expenses.
This Valuation has been taken by way of making Common Size Balance Sheets of similar business and thus are in a range of percentage instead of an overall percentage. Proper Consultation must be taken for assessment of the same. Valuation services can also be provided to you for you to gain a better understanding of which investors and type of investments to look for.