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Pre-Money vs. Post-Money: What’s the Difference?

What’s the difference between pre-money and post-money? The timing of the valuation is the answer to this question. Both pre-money and post-money are valuation measures of companies and are critical in determining how much a company’s worth, especially with start-ups and early-stage companies.

Pre-Money

Pre-money valuation is the value of a company excluding external funding or the latest round of funding / investment. Pre-money is best described as how much a business might be worth before it begins to receive any funding. This valuation gives investors an idea of the current value of the business, but it also calculates the value of each issued share.

Post-Money

Alternatively, post-money refers to how much the company is worth after it receives the cash investments into it. Post-money valuation includes outside financing or the latest capital injection. Therefore, it is important to differentiate between the two as they are critical concepts in the valuation of any company.

Here’s an example which helps explain the difference:

Suppose an investor is looking to invest in a tech startup. The founder and the investor both agree that the company is worth $2 million, and the investor will put in $500,000.

The ownership % of the founder and the investor will depend on whether this is a $2 million pre-money or post-money valuation. If the $2 million valuation is pre-money, the company is valued at $2 million before the investment.  After the investment, the company is valued at $2.5 million. Therefore, if the $2 million valuation takes into consideration the $500,000 investment, it is referred to as post-money.

 

Pre-Money Valuation Post-Money Valuation
 Value % Ownership  Value % Ownership
Founder $2,000,000 80% Founder $1,500,000 75%
Investor $500,000 20% Investor $500,000 25%
Total $2,500,000 100% Total $2,000,000 100%

 

As you can see, the valuation method used can have a big impact on the ownership percentages. This is due to the amount of value being placed on the company before investing. So, if a company is valued at $2 million, it is worth more if the valuation is pre-money because the pre-money valuation does not include the $500,000 invested. While this ends up affecting the founder’s ownership by a small percentage of 5 percent, it can potentially represent millions of dollars if the company goes to IPS / exits.

In many cases, it’s very hard to determine what the company is really worth. Valuation becomes a subject of negotiation between the founder and the investor, especially with start-ups and early stage companies.

Calculating Post-Money Valuation

Calculating the post-money valuation is easy. Simply use this formula:

  • Post-money valuation = Investment dollar amount ÷ percent investor receives

So if an investment is worth $2 million nets an investor 20%, the post-money valuation would be $10 million:

  • $2 million ÷ 20% = $10 million

Bear one thing in mind. This doesn’t mean the company is valued at $10 million before getting a $2 million investment. This is due to the balance sheet showing only shows an increase of $2 million worth of cash, increasing its value by that same amount.

Calculating Pre-Money Valuation

The pre-money valuation of a company comes before it receives any funding. This figure does give investors an indication of what the company would be valued at today. Calculating the pre-money valuation is also easy. But it does require one extra step—and that’s only after you figure out the post-money valuation. Simply:

  • Pre-money valuation = Post-money valuation – investment amount

Using the example from above to demonstrate the pre-money valuation. In this case, the pre-money valuation is $8 million. That’s because we subtract the investment amount from the post-money valuation. Using the formula above we calculate it as:

  • $10 million – $2 million = $8 million

With this knowledge, the pre-money valuation of a company makes it easier to determine its value per individual share. This can be calculated as follows:

  • Per-share value  = Pre-money valuation ÷ total number of outstanding shares

 

Article written by Peter O’Sullivan, Regional Director at The CFO Centre

Growing a Business

A client recently said to me: “I want to grow our business and stop the cash burn – how do we do this? When is it the right time to invest and grow?”

What a tough question to answer. Each business is at a different stage.

We spent a day examining his business and determining what the growing pains were. He had started the business a few years ago and it grew from scratch to $750k turnover last financial year. This year they may potentially reach a turnover of $1.2m.

It was generating a great turnover and growing but they never had any cash.

“Why?” he asked.

After reviewing the business financials it was quite clear that the internal systems were not in place. He could not possibly understand the profitability of the products they were selling due to these inadequate systems.

Therefore they could not take the next step.

The first question I asked was: “Where do you want to take this business – what’s your goal? To build up the business and exit down the line, or are you looking to exit now? Or is this business a keeper if we can generate a great RoI?”

The response was: “We don’t know the numbers or where this business could get too as we have no clarity on the numbers”.

Something I see very commonly here in the SME businesses I work with – no clarity around the financials.

Next Steps

Step one for this particular client was to build a reporting framework around their products to determine what was profitable and what as not. If there were non profitable products (or those that deliver little profitability), should we dump them or only include them bundles in the online offering?

Step two: Build a fully flexible 3-way financial model (P&L, Cash Flow and Balance Sheet) for the next 3 years. Play around with the assumptions, i.e what other products can we put into the offering to customers?

Step three: Monthly reviews against the plan – what worked, what didn’t work and the whys around both.

The right time for a business to grow is when they can balance new customer demand with their internal systems and processes. Moreover, in the instance of this client, increasing recurring revenue streams. Growing faster generally costs more per customer as they need to engage more expensive channels within the business model.

Scalability is about continuing to engage customers with new offerings, and to engage new customers with your offering to the market.

To scale a business one must consider how the business model will affect the bottom line when you expand operations. If you have low capital expenditure and can grow your business with the same revenue / expense % it is much easier to deliver greater numbers in the long term and provide greater options to your customers.

It is early days working with this client but the potential is endless.

How to be More Strategic and Successful in 2021

The impact of 2020 will stay with us for the rest of our lives. It marks a critical inflection point of before and after. It is a year that blindsided many small-business owners.

We’ve seen new businesses birthed with success and others thriving amid chaos. We’ve seen neighbourhood classics tragically lost, and others that struggle to survive day-to-day.

Critical points like these thrust every business owner from acting with strategic intention to reacting to curveballs. As we progress through 2021, most businesses are settling into one of three camps:

  1. Thriving, but not trusting the success
  2. Reviving but hesitant to make bold moves
  3. Surviving and feeling battered, bruised and disillusioned

No matter which category you fall into, you likely are eyeing the rest of 2021 with caution. You’re optimistic but timid in your approach to making those big visionary goals you’ve made in the past. You may even find it hard to dream of a better future because it feels so out of touch with what is happening globally. You are not alone in those feelings.

Now is the opportunity to rewrite the rules and stop settling for less in your business. It is the opportunity to cast a strategic vision that is different from the past and to create more success and growth in your business and your life. Here are some ways you can make it happen.

1. Accept that change is necessary

Change is difficult, but it is for-ever ongoing for small-business owners. And change is happening at a frightening pace.

You’ve likely noticed that the old reliable ways of getting clients and serving them are faltering. The to-do list of things that need your attention is never ending. It’s time to put them to bed.

If change is already happening in your business, why not get ahead of it? When you are reacting to these changes, you treat the symptoms. The better approach is to embrace change to treat the problem.

By treating the problem, you employ change to work with you, not against you. People are likely to welcome strategic change now—especially if the change makes their lives better too.

One way to bring agility and innovation into your business is to implement a quarterly strategic planning and review process into your business. This planning keeps your efforts focused, actionable and accountable while remaining agile and able to shift as new learnings come to the table.

As part of the process, ask yourself these questions.

  • What would disrupt your business enough to change everything?
  • How can you be on the leading edge of that change?
  • How can the business be relevant and profitable five or even 10 years from now?

 2. What does the customer really want / need?

The old rules of supply and demand have gone. Through issues with manufacturing and distribution, product-based businesses feel the pinch. Changing client needs and social distancing have left recession-proof businesses struggling. Service-based businesses are finding that their services are no longer crucial or needed. No business or business model has been unaffected.

The reason is simple: The customers’ needs and their problems are in a constant state of change.

Engaging in a conversation with your clients to identify opportunities is a perfect strategy moving forward. The strategy could be as simple as asking a probing question at the end of every client interaction. It could also be more involved such as surveys or quarterly client advisory groups, to follow a more formal process.

More than ever, staying in tune with the customers’ needs and the problems you can solve is imperative. It is the gateway for future growth and innovation.

3. Work smarter, not harder

Australian culture is all about hard work. If you have struggled to achieve your goals, you’ve likely heard someone telling you to work harder.

Since the rise of intellectual capital as a commodity in the 1980s, the ability to be successful is less about our ability to work hard. Many business owners have told me how hard they work only to find success seemingly out of their reach. Evidence that success is not about hard work.

Sure, success demands focus, determination and resilience. But I challenge the notion that hard work is one of the requirements. If it were, we would have more success stories to celebrate.

Working smarter is about leveraging the talents of people and collaboration. When you remove hurdles and bottlenecks in your processes, you promote ease. It’s the processes that are often the problem. That which is easy gets accomplished. That means being able to produce more revenue with the resources you have. You likely will see a boost to team morale and stop spending time putting out fires.

It leverages technology and systems to streamline the business, allowing it to run smoothly. According to Gartner Research, by 2024, organizations will lower operational costs by 30% by combining hyper automation technologies with redesigned operational processes.

Consider which elements of your client experience and service could be delivered through automation, saving critical points for human interaction and forward looking strategies for your business. The organisational efficiencies gained can offset growth investments and produce a more efficient team.

4. Profit is the aim, not a reward

One of the most misleading entrepreneurial and inspirational quotes is: “Follow your passion and the money will follow.” If only things were that simple.

If success is a reward of hard work, this quote puts profit on the same unattainable pedestal. Passion for what you do gives you fire in your belly and can bring a sense of contribution. At the end of the day, though, passion doesn’t pay the bills; prolific profit does.

By shifting your mindset around profit and other metrics in your business, a magical change in how you spend your day occurs. You start focusing on initiatives that produce results and impact your bottom line.

A 2018 Cone/Porter Novelli Purpose study found that “78% of Americans believe companies must do more than just make money; they must positively impact society as well.” This marriage of purpose and profit is an instance where everyone wins. Clients love supporting social impact; businesses can be profitable and improve their community and world in the process.

For many of my clients, bringing profit up on the priority list, even with reduced revenue, is the defining element of rebuilding business stability.

5. Be a confident leader who empowers others

The entrepreneurial trials of the economic crisis have shaken the confidence of even the most experienced entrepreneurs. We are questioning everything in our professional and personal lives. Whispered conversations with other entrepreneurs over the year let us know that we are not alone in that journey.

With this period of reassessment, the future feels less certain. That uncertainty erodes our confidence to take risks and make bold moves. Past success, “knowing” and being right are pillars in the old definition of confidence.

Be careful—that shaken faith also seeps into our teams’ bones. They want something to champion.

There is good news that can breathe new life into your confidence. You do not need all the answers. You do not even need to know the “how” beyond “what is the best next step?” And, you don’t even need to be right.

Empowering others is what defines the success of top leaders. What got you here has centered around who you are and what you can accomplish. Those accomplishments won’t fuel the future. Relying on your efforts alone is a limiter when scaling your business — even in strong economic times. The old definition of confidence was about what you could do. Your future confidence needs to be about your team and the belief in what the team can do.

For 2021 to be the beginning of your comeback story, you need to take action differently enough to move the needle in your business. Make bold moves that advance and protect your business. Marry your vision to these tips, and you could be looking at a successful year.

Peter O’Sullivan, CFO Centre

What does a CFO Actually Do?

Often, we get asked by friends, family and peers: What does a Chief Financial Officer (CFO) actually do?  These are frequently people that have known us for years, that we dine with regularly, share holidays with, stand at the side of the footy pitch with! Yet, they don’t fully understand exactly how we have spent our working lives dedicated to helping business owners to transform and scale their businesses. So, if the term “part-time CFO” is as alien to you as “UFO”, here’s what we do, in a nutshell:

Whilst a CFO is a qualified accountant, they also have decades of high-level commercial experience, quite often across many industries.

A CFO works alongside you as the business owner/CEO – giving you more time to work on the business instead of in it. The part-time CFO concept is tremendously cost effective as most CFOs pay for themselves with the cost savings they identify in your business.

 In a nutshell, a CFO will typically:
  • Help you strategize, plan and operate your business to maximise on cash, profitability and company value
  • Gain access to funding
  • Ensure you have a solid banking relationship
  • Become the custodian of your internal Finance function.
  • Work with your bookkeeper or Finance Officer and/or external Accountant.
  • Analyse results in the context of the company’s objectives and strategies.
  • Establish clear KPIs (measures that really matter)
  • Ensure you (the owner or CEO) understand the financials, the trends and the issues they identify
  • Assist in growth, expansion (including overseas) and exit strategies
  • Become a trusted sounding board and devil’s advocate

The need for a part-time CFO may appear earlier on your journey than you may expect.  For instance, you may have turnover of over $1million and are experiencing growing pains. Perhaps you would like to grow in a sustainable way, or improve the financial performance of your business. Either way, I would say it’s worth exploring how a CFO can help you in your business.

 The CFO Centre

The CFO Centre provides part-time CFOs to SMEs, so you get the experience of a high calibre CFO for a fraction of the cost of a full-time resource. Our CFOs have years of experience as a Senior Finance Executive or CFO for large corporations. They have extensive knowledge and experience to bring to your business.  In addition, with no lock in contracts, we can work with the needs of your business, providing our services 1-2 days a week to as little as one day a month.

As a global company, we have over 700 CFOs in 18 countries, so we really have seen it all!  Therefore, the benefit for you is that no matter what your needs, however complicated, you can tap into that global wealth of knowledge at no extra cost. It’s pretty powerful stuff.

Find out more or get in touch 0n 1300 447 740 or visit www.cfocentre.com.au 

Who is Working for Whom?

A rhetorical question for you – “Is the business working for me or am I working for the business?”

Before you answer, perhaps it may be opportune to really reflect on where things stand for you and your business, and what you would like to achieve this year for both.

The thought of taking some time out for reflection may sound like a “nice thing to do”, however it can be a very powerful exercise.  It’s been one year since Covid hit, have you made time (with no distractions) to REALLY reflect? Or have you been swept into 2021 with hardly time to a take a breath?

Time to reflect

The practice of Reflection can be an excellent way to provide you with a sense of calm and clarity, allowing you to get clearer on:

  1. What is most important to me personally? (ie what do I value most?)
  2. Am I living the life I choose? If not, what is stopping me?
  3. Why did I start or buy the business?
  4. Are those reasons still valid and aligned with what I want now and for the future?
  5. What does the business need to look like to support my vision and goals?

When you are clear on what is most important to you and the life you would like to live, you can then look at your business through a different lens.  It allows you to honestly question whether the business, in its current state, is an enabler or distractor from achieving your personal goals.

Reflection paves the way for truly effective business planning. This starts with YOU and PURPOSE rather than the business itself. With renewed clarity you gain from personal reflection, your plans for the business may start to look very different. For example:

  • Reducing business dependency on you (or “key people”). This frees you up to spend more time with family or more time to pursue the things that make you truly happy.
  • Exit or succession planning to facilitate your retirement or next project. And we know this often takes longer to successfully implement than you think!
  • Realign the business to better reflect your personal values (such as ethical, social, or environmental considerations).

What’s next?

If “more of the same” doesn’t sound appealing to you, take time to reflect on your Why and personal goals. You can then consider and plan how your business will support you in achieving the life you desire.

The CFO Centre is a worldwide group, united by the common Purpose: “To help you live the life you choose by defining and delivering on the numbers that REALLY matter”. Please jump on our website if you would like to know more: www.cfocentre.com.au

Why SME’s shouldn’t ignore Risk Management

Many people think that risk management is only for large corporations. This is not the case! Risk management is a NECESSITY FOR EVERY BUSINESS. The hard part is to properly align risk management processes to each unique organisation.

The world is undeniably riskier. Change is ever more rapid, and this has been accelerated by COVID. Increasing digitisation of business processes will inevitably increase cyber-security risk. The world is still highly connected, and McKinsey estimate that supply chain shocks will reduce profits by 42% of annual EBITDA profits every 10 years. Geopolitical risk, climate change, border closures and business disruptors (new business models, social media etc) will all play a part.

• RISK MONITORING

It’s important not to let risk slip off the radar, and for to you be aware of possible issues. Talking to people in your industry can give you insights from other perspectives. Being sucked into day to day operations can leave no time to think about strategy and risks. Moreover, when implementing these strategies, try to consider the related risks by staying close to your business analysis and industry trends.  Talking to a CFO, who with a wealth of experience and a fresh pair of eyes may give you new perspectives and insight!

• RISK APPETITE

Decide how much risk you are willing to accept. This depends on the operational and financial strength of the organisation, as well as the business strategy and your risk versus return profile. What’s the takeway? Risk is part of doing business, but make sure it is within your limits, and you are in control.

• RISK MANAGEMENT

  • Understand how to mitigate risk, e.g. insurance, experts, financial tools or internal controls.
  • Work on simple scenario modelling to understand implications and solutions. Simple cyber security audits can also be useful.
  • Curtail activities that exceed your risk limits.
  • Restructure staffing so that owners/managers have some time to think about risks and strategy.
  • Ensure risk management is embedded in the organisation.
  • Ensure internal controls are in place so you have confidence that risks are controlled and reported.

Risk management is a must do. To be successful it needs to be correctly sized, using appropriate techniques. If this is not done, risks can damage or destroy the business. Too complex and it will detract from the real world task of running the business (and probably wont get done anyway!).

Gary Campbell is a CFO Centre Principal based in Melbourne, Australia, advising SMEs on finance, strategy and governance. He is a qualified accountant, MBA, and graduate of Australian Institute of Company Directors. He can be contacted on [email protected]

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