Business Plan Competition: Finance Issues

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Business Plan CompetitionFinance Issues
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Key Questions to Be Addressed

• How much do you need and when do you need it?
• Business form
• Proforma statements
• Timing of cash investments
• What is the deal?
• Are you asking for debt or equity?
• How much of your company are you willing to give
  up for the invesment?
• What is the deal structure?

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Business Form

• C-Corporation
• Subchapter S corporation
• Sole proprietorship
• Partnership
• Limited partnership
• Limited liability company

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Proforma Statements

• Income Statement
• Forecasts profitability as measured by accounting
  rules
• Needed to forecast taxes correctly
• Does not reflect cash flows
• Balance Sheet
• Shows assets and liabilities at a given point in
  time
• Statement of cash flows
• Most critical to determine how much you need and
  when you need it
• All statements must reconcile!

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Income Statement
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Balance Sheet
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Cash Flow Statement
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Proforma Statements

• Usually require monthly forecast until business
  becomes cash flow positive
• Critical to know when cash needs are greatest
• May occur part way through year
• After business becomes cash flow positive annual
  statements for a few years still needed
• Valuation depends on long run potential
• Valuation methods require proforma estimates

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Timing of InvestmentsUsually not all at once

• Spreading it out reduces risk to investor
• Investor will establish your burn rate based on
  your proformas
• Investor will give you enough to get through a
  period of time and then force you to come back
  and report performance
• As business grows, better estimates of cash flow
  needs become available
• Obtain better valuations as the business grows
  and performance is demonstrated

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What is your deal?

• For high risk, new start-ups investors usually
  demand upside
• Financing new business with debt usually not
  possible
• Not enough collateral
• Risk too high
• Many forms of equity
• Straight equity
• Hybrids such as convertible debt or convertible
  preferred shares
• Standard venture capital form is convertible
  preferred shares

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Valuing your company

• Discounted cash flow
• Forecast cash flows
• Estimate residual value at end of forecast
  horizon
• Discount back at rate which reflects risk
• Use multiples based on comparable companies
  currently trading
• Price/Earnings ratios
• Business Enterprise Value
• BEV/EBITDA
• BEV/Sales
• BEV/Operating characteristic
• Venture Capital Method
• Forecast to liquidity event
• Value company based on multiples
• Divide by payoff multiple
• Adjust for any dilution caused by later financing
  rounds

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Venture Capital Method Example

• Forecast to liquidity event
• Five years from now
• EBITDA 15 million
• Comparables companies trade at 10 times EBITDA
• Value in 5 years 10 x 15 million 150 m
• Divide by payoff multiple
• If 10, value today 150 m/10 15 m
• If 20, value today 150 m/20 7.5 m
• Determine capital needed
• If need 3 million, will need to give up
• 3/15 (20) of your company if 10 times payoff
  required
• 3/7.5 (40) of your company if 20 times payoff
  required

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Deal Structure

• Straight equity
• Simplest
• Must deal with control issues
• Convertible security most common
• Convertible debt if taxable profits
• Convertible preferred most common
• Protects investor if things go wrong
• Senior to entrepreneur
• Covenants
• Be aware of clauses in deal structure
• Participating clause
• Ratchet clause
• Etc.

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Sources of Capital

• Friends and family
• Angels
• Government entities
• Utah Technical Finance Corporation
• Small business administration
• Venture capital
• Deals must be large
• Business must be scalable
• Require very high rates of return
• Structure business form and deal to match
  forecasted liquidity event

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Good luck!