Valuation of a Private Internet Gaming Company

[Falang]

Say an online gaming company has a one year verifiable track record and profits in that year of over $200,000. The company has solid growth of 5-10% per month, and other than the current legislative climate, the company has excellent future prospects for growth and profits.

Obviously more information is needed to do a thorough analysis, but given the above, how much would the company be worth, approximately?

[sillyarms]

It Depends on what your capitalization rate is but for what it's worth.

Capital Cost (asset price) = Net Income / Capitalization Rate

Say your cap rate is is 11% for example

$200,000 / 0.11 = $1,818,181.82

http://en.wikipedia.org/wiki/Capitalization_rate

[maxtower]

Until more is known about the situation with online gaming's legality in the US the company would probably be discounted compared to a company in a more legitimate business. Given this fact, valuations are made more difficult.

[laserboy]

There are a lot of factors to consider here...

The most recent comp I have looked at is Gamebookers which was acquired by Partygaming in August for roughly 12 x projected 2006 EBITDA. I think Party paid a very rich premium, however, based on the facts that:

A) Gamebookers revenues are entirely non-US based, therefore not subject to the risk of US legislative action and
B) The cross selling benefits with Party will make make it much more valuable to them than it would be to other potential suitors

Partygaming itself, for instance, sells for at an EV/EBITDA of about 10.

On the other end of the spectrum, Sportingbet sells at an EV/EBITDA of about 6. But of course their CEO is in jail.

One thing you have to realize is that there are literally hundreds of small online gaming sites out there with very little to differentiate them or barriers to entry. The 5-10% monthly growth rate is huge in normal business terms but unextraordinary in the online gaming market. Unless there is something particularly special about your business, it's hard to imagine it being worth more than 8 x earnings if even that in today's climate.

Just my humble opinion...

[laserboy]

Enterprise Value of roughly $8B.

Estimated 2006 EBITDA of ~$800M.

Cap rate = 800M/8B = ~10%

Cap rates are usually used as a metric in real estate though. Stocks and companies are typically valued in price ratio terminology like Price/Earnings, Price/Sales, Price/Book, EV/EBITDA, and so on.

[Falang]

[ QUOTE ]
Unless there is something particularly special about your business, it's hard to imagine it being worth more than 8 x earnings if even that in today's climate.

[/ QUOTE ]

So you are telling me my company is worth over $2,000,000. Yet you are saying this as if it were a bad thing. I'd be pretty happy with that, not that I'd ever want to sell it...but just for ego purposes [img]/images/graemlins/grin.gif[/img]

[laserboy]

[ QUOTE ]
So you are telling me my company is worth over $2,000,000. Yet you are saying this as if it were a bad thing. I'd be pretty happy with that, not that I'd ever want to sell it...but just for ego purposes

[/ QUOTE ]

Well if your business is genuinely growing at a sustainable 100% YOY rate (that's a big if!), then $2M is less than three years profits (400K, 800K, 1.6M...) for you assuming the US government doesn't get in the way.

If that really is the case, then $2M for your business is really just chump change. [img]/images/graemlins/grin.gif[/img]

[Scorpion Man]

nowhere near enough info...and do you mean 5-10% sequentially per month?? that is a huge difference in range because of compounding. For example it is hard to give a rule of thumb valuation for a company growing 10% seq each month, if this is what you mean. You would have to look forward a few years at your best bet and discount back. Then take a major whack (50%??) for the legislative environment if has the potential to kill the business.

also...does the $200k profit after tax or pretax, and does it include an expense for the compensation of whomever is running the business.

[Falang]

L & S,

I can't imagine it doing 400k in year two or 1.6m in year three. I assume the growth will slow as it has been. It is unlikely to ever shrink or stop growing, but torrid growth is hard to maintain past a certain point.

For the first five months or so it was rediculous like 30%+ month over month growth, then it slowed to about 15-20. Now it is kindof hitting a pleteau and steady growth period, 5-10% a month.

Before tax, after compensation.