Page 144 - Business Plans that Work A Guide for Small Business

The Critical Risks and Offering Plan Sections • 135

FV = PAT * PE.
FV = $2.1 million * 10.
FV = $21 million.

The final step is to divide the FV of the investment by the FV of the
company. What we are basically doing is determining what percentage
of the company the investors need to own so that they can earn their ex-
pected rate of return.

FVi/FV company
$1.2 million/$21 million = 5.7 percent.

Once we know how much equity Lazybones needs to sell in order
to secure the investment, we can determine the value of Lazybones to-
day (rather than in five years). We basically divide the investment sought
($500,000) by the equity that amount purchases (5.7 percent).
$500,000/5.7 percent = $8.75 million.
As investors, we are always skeptical of an entrepreneur’s projections.
Entrepreneurs tend to be overly optimistic. Thus you need to be careful
when going through this exercise not to be surprised if an investor has a
significantly different estimate than you do. There are several assumptions
that can be widely off. Based upon our extensive experience, for instance,
we would demand 10 percent of Lazybones’s equity. That percentage sug-
gests that Lazybones is worth roughly $5 million today ($500,000/10
percent). We are, in essence, questioning the accuracy of Dan’s financial
projections. We are basically questioning whether all the new units that
Lazybones opens will perform as well as the established units. Thus we
expect revenues to be lower than Dan projects.
Even though we recommend you have some basis for determining how
much equity you need to give in order to secure the investment, we do not sug-
gest that you present that in the business plan. This gets back to our opening
statement that valuation is a negotiation. As such, putting in how much you
are willing to give might end the negotiation before it starts. If, for instance,
we saw that Lazybones only wants to relinquish 5.7 percent of its equity for
$500,000, we would probably not consider the investment. Nonetheless, it is
important for you to go through this exercise so that you are operating from
a position of knowledge when you do negotiate with investors. Thus the of-
fering section is often very short, possibly only a sources and uses table with
some description around it. Let’s look at the Lazybones offering plan.