Forums: Discussions for entrepreneurs and small business.

I`ve read the post’s and see that many of you are versed in structuring start up`s.

 

I`m meeting with large companies that are closely related to a business that I have developed. They are interested in the project because 1. It is another service that they could offer. 2. It fills a need within their industry. 3. It will add money to their bottom line. 4. They will get additional exposure.

 

- Is there a rule-of-thumb % offered by the developing company? 

 

Thanks,

Sold

That is an eternal issue in any negotiation.  The answer lies in what would be the cashflow stream in the future, then turn that into Net Present Value.  Then figure they want 5-10X return on their money.  Thus the percentage equity they would want, typically >50%.

Yes investor`s money seem to carry a lot of weigh.  The alternative is to work with angels who don`t want to control the company, or to bootstrap, which is not easy.

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Innovator7 definitely has the right idea. You will need to compare the money they are putting in with the value of your company at that time.

However, I wouldn`t be too sensitive to the amount you need to give away. The goal here is to create a business that grows and brings you income. Would you rather have a big piece of a small pie, or a small piece of a bigger pie. Generally, you want the latter, as that will have much greater value to you. However, certainly sometimes it is prefered to just retain control, even if it means missing an opportunity.

Soldu2,

The question is a very difficult one to answer without knowing considerable more detail.  However, controlling interest may or may not be an issue.  To answer that question, you must figure out what the true, realistic potential for the company is.  And what percentage of the funding are you looking for.  If you contribute the majority, that`s one thing.  If you have investors putting up 100% of the cash and you`re putting up sweat equity, that`s something totally different. And then, again, if you`re talking Microsoft potential, who cares about retaining controlling interest?  If you`re talking mom and pop and your investors are footing the bill, then you will want to retain controlling interest because the cash flow will be relatively small, but you probably won`t be able to because your finance guys will want a reasonable return on their investment.

The next question is why do you want to retain controlling interest?  Is it profit related, vision related, ego related, or some other reason? 

Without giving your idea away--although that shouldn`t be a concern since it`s already up and running, let me ask a few questions:

What is the current value of the project?

Is it turning a profit?  Breaking even?  Running a deficit? 

How much future business is booked?

How much are you seeking? And what percentage of the total is that?

What are you anticipating the investors to get within 12 months? 24 months? 60 months?

What is the primary--and secondary, if any--reasons for wanting to maintain control?

What is the realistic potential for the company? Over what period of time?

What is your competition like? How well funded are they?

The more you information you can give, the more reasoned response you can get.

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Paul McCord Author, Creating a Million Dollar a Year Sales Income: Sales Success through Client Referrals http://www.powerreferralselling.com

How does one valuate a service/marketing tool that displays hyper growth/hyper profit in addition to great PR for the host company?

How do you valuate good PR and corporate image enhancement?

 

The problem is you have to have realistic and believable numbers to present to a potential investor.  Consequently, you have to boil it down to dollars and cents within a specified time-frame.

Certainly there is a dollar value to the PR; there is a dollar value to the "hyper profit"; there is a dollar value to corporate image enhancement, i.e, goodwill; and there is certainly a dollar value to hyper growth.  But numbers and time must be filled in--and those determine potential return on investment.  An investor is going to be interested in potential return, but even more interested in the time value of his/her money.  You`ll have to demonstrate a realistic and superior time value of money over their other alternatives (there is more that goes into it than just that, but that`s where you`ve got to start with your analysis of what you`re going to present to an investor--what can they reasonably anticipate within what period of time and how does that stack up to alternative investments?).

You have to define what hyper growth is; what hyper profit is and the value of the PR and goodwill.  Unfortunately, you`re the only one who knows the product/service and its potential, so you`re the only one who can define those items at this time.

 

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Paul McCord Author, Creating a Million Dollar a Year Sales Income: Sales Success through Client Referrals http://www.powerreferralselling.com

The next question is why do you want to retain controlling interest?  Is it profit related, vision related, ego related, or some other reason? 

Profit, Vision, Direction and having the Inclination to proliferate into other markets. (it`s my pet project) no one will be more passionate about its success.

Also, I have herd many stories of the 49% partner being forced out of the operation for various reasons.

What is the current value of the project?

‘Current’ value is just under one million.

Is it turning a profit?  Breaking even?  Running a deficit? 

Even

How much future business is booked?

15% of the total (on deck)

How much are you seeking? And what percentage of the total is that?

That depends on how we align ourselves with the hosting company. 1/3 guaranteed draw of estimated gross value and 1/3 share in “after expenses” profit. (Seeking)

What are you anticipating the investors to get within 12 months? 24 months? 60 months?

12 month: even     24 month: +$000,000     36 month: compound and so on.

What is the primary--and secondary, if any--reasons for wanting to maintain control?

1. Increased dividends 2. Fulfilling a vision to build something great.

What is the realistic potential for the company? Over what period of time?

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What is your competition like? How well funded are they?

I am specialized and will be a market disrupter to competition. (No direct competition at this time)

The more you information you can give, the more reasoned response you can get.

Thank you, for helping me think through this.

Hyper growth is examplified by Google.  But even Google didn`t claim "hyper profit" when they make billions of dollars.



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I didn`t mean to be hypercritical, just wanted to put things into perspective, knowing small business => small profit.

Typical VC expects sizable sales of a startup to rise exponentially the first 5 years to at least $100Million before they invest.  That`s my experience.  My own business plan projects even higher sales, in a 10B market space.  The VC I deal with hasn`t signed the check, if ever.  They want "market validation" before they invest.



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Go Green and put more money onto your bottom line with award-winning LED-based light bulbs PearlLED. If you manage a good sized store/business and want to boost the bottom line, call us!