Question

You own 100% of a small business. You need a $250,000 investment. Your forecast shows net income of $1,500,000 in five years. You expect that the company will be worth 10 times future earnings. What percentage of your business would you offer for a $250,000 investment in order for the investor to achieve a 45% return?

Answer 1

Investment now = 250000
Period = 5 Years

Worth Needed after 5 years to earn return of 45% = Investment * (1 + Rate)ⁿ
Worth Needed after 5 years to earn return of 45% = 250000 * (1 + 45%)⁵
Worth Needed after 5 years to earn return of 45% = 250000 * 6.40973
Worth Needed after 5 years to earn return of 45% = 1602434

Companies Worth after 5 Years = Earnings * 10
Companies Worth after 5 Years = 1,500,000 * 10
Companies Worth after 5 Years = 15,000,000

%age of businees can be offered = 1602434/15000000
%age of businees can be offered = 10.68%