Crowdfunding and Business Valuations

During my travels to meet with leading law firms around the country to discuss the implementation of equity crowdfunding, I have heard a consistent refrain: How do we value these businesses for purposes of selling shares?

Well, the answer is no different really in a crowdfunding setting than any time that a company sells equity. The amount of the shares should be an accurate reflection of the value of the business based on current and anticipated profits. However, because the real power of crowdfunding is based on making the new owners feel like they are participating in a wonderful venture, the valuation should accurately reflect the ability of the company to distribute profits to the investors (in the form of distributions or dividends) and allow them to get that solid return.

But the real question, after more thought, is “Won’t crowdfuding campaigns give us a window on TRUE business valuations?”

If you want to guesstimate how much your home is worth, it is easy. Because the actual real estate sales prices in the neighborhood are public information, websites like Zillow.com can give you a solid sense of the worth of your specific house. In public trading markets, we can see the market cap of any company instantly on any search engine.

But for a private company, there is an incredible amount of mystery, because the sales prices are almost never made public. The result is that business brokers and investment bankers are forced to make their best efforts to develop a market for the sale of a company.

Equity crowdfunding is great, because the information will be publicly available. It means that analysts will be able to compile information about private company values much more easily. And it will make it much more easy to know how much your private company is worth – all thanks to equity crowdfunding.

Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.