<![CDATA[QH - Articles]]>Sun, 17 Dec 2017 07:24:38 -0800Weebly<![CDATA[How to Value Your Start-Up Business Plan (How Much Is It Worth?)]]>Thu, 14 Aug 2014 15:05:33 GMThttp://qutbull-hoda.com/3/post/2014/08/how-to-value-your-start-up-business-plan-how-much-is-it-worth.htmlBefore you start thinking about what your startup is worth, there are three terms you need to understand. These are:

  • Pre-money valuation
  • Post-money valuation
  • Exit valuation

Each of these are important and give you an idea of what dollar value you can place on your business.

Pre-money and post-money valuations are determined by what your investors are offering you (or what you are offering your investors). The terms simply describe the size of the pie based on what portion slice your investors are getting.

So for example, if your investors are offering you $1 million for 25% ownership of your business, then the value of the entire business is $4 million. Simple, right? This is a post-money valuation, since it assumes the size of the pie after including the $1 million injection from the investors.

Pre-money valuation is the value of your business before including the cash injection from your investors. In the above example, the pre-money valuation is $3 million, since your investors have not yet invested the $1 million that they are supposed to give you.

Now, the exit valuation is where things really get interesting. This is the dollar amount that your business will sell for when your business is ready to be snapped up by Google or Facebook or whoever else wants to buy you out, or what your business will be worth when it's ready for an IPO.

We know that startups at any stage of their life are being bought by big companies that can afford to purchase them. Frequently these businesses are purchased for huge amounts of money, sometimes more than $1 billion.

So what will your business be worth when you make your exit? There are many approaches to calculating an exit valuation, which we will just discuss in a minute. But first, let's understand the relationship between your exit valuation and your pre-/ post-money valuation.

Let's go back to the example in which your investors are giving you $1 million in exchange for 25% ownership of your business. Your investors will want to make healthy returns on their investment when it's time to exit. Some investors are happy receiving 10 times what they invested, while others need 30 times or more since it's such a risky investment.

Supposing your investors want 20x returns. This means they should get $20 million as their share of the exit prize money. If you remember, they own 25% of your business, so that means the total exit valuation of your business should be $80 million in order for them to show interest.

Try this pre-money and post-money valuation calculator to get a better hold of the numbers. Workings are shown so you know exactly what's going on.

Back to the interesting part now. How do you figure out what your exit valuation will be?

The best thing you could do is obviously to gaze into a crystal ball and see yourself in an expensive suit negotiating across the table with your future parent company about the exact dollar amount of the exit prize.

But since nobody can see the future with such clarity, MBA Finance guys are the next best bet. These amazing super-humans are armed with cryptic formulas (sorry, 'formulae') that can put an exact dollar value on all your future earnings, right down to the penny.

Mostly, they discount your future cash flows based on the principle that a dollar earned in the future is worth less than a dollar earned today, so future earnings should be discounted using an appropriate discount rate. This is known as a DCF analysis (Discounted Cash Flow analysis).

So if you're likely to make $250 million in profit in five years from now, then this will be discounted back to the present day to arrive at a net present value that could be $30 or $40 million.

However, Finance guys are usually quite a shady lot who are pretty unhappy with life and eventually realize they are living a lie so don't depend on them too much. (Just kidding!). (Not).

An even more accurate way of understanding your exit valuation is by looking at similar companies who have made an exit recently. Of course, you need to come up with a pretty detailed analysis to prove the similarity. A good business analyst, consultant or MBA Finance guy can help you with that.

At the end of the day, understanding your exit valuation is very much like gazing into a crystal ball, so you need to rely on good sense to come up with a realistic valuation. It all comes back to how much money you're trying to raise and the share of equity you're willing to give, because then you can at least have an idea of the exit valuation you should be having.

Preparing a business plan that discusses your business idea, the market and all the internal and external factors to arrive at an appropriate ball park figure is the key to a credible valuation.

After all is said and done, probably the best advice you can ever get is that you shouldn't waste too much time dwelling on your business valuation. You should be focusing on having a business to value.

If your business idea will sell, you'll get a good valuation from the market. Make sure the idea is well presented and makes rock-solid sense to investors.
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<![CDATA[The Business Plan Financials: Simple and Sweet (But Not Too Simple and Sweet)]]>Sat, 20 Apr 2013 13:50:21 GMThttp://qutbull-hoda.com/3/post/2013/04/the-business-plan-financials-simple-and-sweet-but-not-too-simple-and-sweet.htmlUnless you are proposing your business idea will bring a billion users like Facebook or an end to the depletion of the ozone layer, it's no surprise that the business plan financials are the only thing that really matter to investors. (Okay I lied about the ozone layer - they probably don't care about that either).

So when you tell them, "oh well, I guess we will make like, a million bucks in Year One, maybe", rest assured your audience is going to send you back to the drawing board because, quite frankly, you don't have a clue.

On the other hand, if you think you can tell investors your exact net profit in Year Five right down to the penny, well that's a sure sign of dementia. Nobody can tell the future, even investors realize that.

There's one thing you should know, if you haven't realized it already: any investor who's made it as far as the financials is genuinely interested in your business. But nobody is taking your word for it.

Investors realize they are reading a business plan, not a term report. They want to know you have a clearly defined revenue model and a good understanding of the market as well as the internal operations coupled with your personal goals and objectives, so you have some extra breathing space to make an argument.

Any professional investor conducts what we call in the industry - due diligence. This means they may even go as far as draw out an entire financial projection all by themselves to see whether your numbers match up, in addition to verifying every piece of information presented.

So what really strengthens your case are extrapolated results from a test market sample of actual sales revenues, benchmarking with your closest competitors at each stage, demand-supply gap, industry statistics regarding key performance metrics, industry beta and growth rates etcetera.

If the last sentence didn't make any sense, that's perfectly okay. You don't have to be an auto-engineer to drive in a race. Basically put, your financials should show you have big ambitions that you are willing to work hard for, but are firmly grounded with real evidence.

So if your gaming app is going to have a million users by the end of Year One, your financials will talk about monthly downloads and user retention that are within acceptable limits for your app category and comparable levels of marketing spend by your competitors. Or if you're selling hot dogs in a food truck franchise, maybe you can use the trial month's sales as a base for your initial sales projections.

It is recommended that the numbers should not be hard-coded in your forecast because you may want to update them regularly. Ideally, your workings should be in the form of a financial model that updates the P&L, Balance Sheet and Cash Flows based on basic input parameters. For example, an increase in the conversion rate for Q2 should immediately improve your revenues and marketing ROI.

Having said that, try not to turn your spreadsheet into a monster. List all the key drivers in one place and the effect it has on each line item before concluding with your projected financial statements. All your assumptions should be clearly explained and no questions left unanswered. Use charts to discuss complex issues and keep your language crisp and clear.

A final sanity check is essential before locking it down on paper. You may realize that sales are growing way too fast or your margins are unrealistic. Customer acquisition costs are also frequently assessed for credibility. In case any of these are out of whack, revise and re-revise your model till it all makes sense.

Now that you have a presentable set of financials, you can also determine a reasonable valuation for your business. I will be discussing more about this in my upcoming articles.

If you need help coming up with a set of realistic financials, we'll be happy to chip in our expertise. Please contact us for more information.]]>
<![CDATA[The Essentials of How to Write a Business Plan]]>Wed, 14 Nov 2012 14:45:10 GMThttp://qutbull-hoda.com/3/post/2012/11/the-essentials-of-how-to-write-a-business-plan.htmlAs long as you have the key facts figured out, getting your business plan on paper need not be such a challenge.

Industry experts agree that the most common reasons why b-plans head straight for the shredder are because of the small things that give it away as an amateur production: unrealistic claims about competition or risk, spelling, punctuation, and grammatical errors, content and formatting errors, incomplete or vague information, and so on.

Considering that your business plan is the first ever impression of your business, a sloppy piece of work is not going to be read through seriously - especially if its being read by angels and VCs who have to choose among several businesses vying for their attention.

Most plans are divided into standard sections to discuss the business proposition, the management, the market and unique strategies for marketing and operations. The most critical information should be presented upfront rather than buried deep inside the pages, and sections should be well-balanced and inter-related.

Having said that, there is no fixed format for a business plan - sections are put together depending on their relevance to who is going to be reading the plan. For example, a plan for investors is quite different from one put together for internal purposes only.

Presentation is key so that the content is not unnecessarily complex or overly simplified - the plan should be easy to read and build up excitement from logical reasoning and facts (not hot air). Along the way, a clearly emergent SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) should become evident.

The executive summary at the beginning can make it or break it, so it needs to receive as much attention. Together with the investor presentation, it should do a nice job of summing up your entire plan so even though it is the first chapter, it should be written last.

Financial projections that can be supported by actual market facts and data will make sure the nuts and bolts are in place since a lot of investors might read nothing more than the executive summary and the financial projections (though all the other sections need to be there for reference and due diligence once your business is short-listed).

No matter what level you are at, a proper business plan is ideally never written by one person alone - there are bound to be some gaping holes you somehow overlooked in all your excitement.

Business plan software and templates give you some broad areas to discuss, but you should spend your time on more focused responses. Rather than 'filling in' sections using a hammer and chisel, try to find answers to specific questions your potential investors will be asking you.

Business consulting firms are usually far more useful than software or templates that are one-size-fits-all, and can help you write a solid plan that gets results.

If you can come up with good answers to questions the consultants put forward, you do not have to worry about the presentation, since the documentation of your responses (with added value) is the responsibility of the consulting firm. The Q&A sessions will also help you build confidence when you actually talk to investors.

Services provided typically include writing, market research, financial modelling, proof-reading, editing and review. For a slightly larger budget, a serious firm will even provide consulting to develop your business strategy. However, you should make sure the consultant works closely with you so that the end result is no less than what you bargained for.

In case you are not in for the additional investment for acquiring these services, make sure your plan receives a good sanity check from your cohorts and is looked over with a critical eye by at least one person external to your business. And don't forget to spell-check and watch your grammar.
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