strategic business planning part 3
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Strategic Business Planning Part 3TRANSCRIPT
Copyright © March 2004Wharton Small Business Development Center
STRATEGIC BUSINESS PLANNING
Welcome! Session 3 – July 20, 2004
Instructor - Kevin [email protected]
Copyright © March 2004Wharton Small Business Development Center
STRATEGIC BUSINESS PLANNING
The Wharton SBDC is part of Wharton Entrepreneurial Programs and the Sol C. Snider Entrepreneurial Research Center. The Wharton Small Business Development Center is in part financed by a grant from the Commonwealth of Pennsylvania, Department of Community and Economic Development. The Wharton SBDC is funded under Cooperative Agreement No. 4-603001-2-0040-24 by the U.S. Small Business Administration. The support given by the U.S. Small Business Administration through such funding does not an expressed or implied endorsement of any of the co-sponsors’ or participants’ opinions, findings, conclusions, recommendations, products, or services.
All SBDC programs are non-discriminatory and open to the public. Reasonable arrangements for persons with disabilities will be made if requested at least two (2) weeks in advance. Please contact Dr. M. Therese Flaherty, Director, Wharton Small Business Development Center, University of Pennsylvania, 433 Vance Hall, Philadelphia, PA 19104, (215) 898-8635.
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Agenda – Session 3
Recap from Session 2 Where We Are and What’s Left Financial Plans Cash Flow Tying It All Together Preparation for Next Session
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Recap – Session 2 Industry Analysis
Were you able to identify your NAICS code? Research? Sources? Surprises?
Competitor Analysis Number and types? Business performance data?
Sales Projections Were you able to define your sales unit(s)? Can you describe the reasoning behind your projections?
Marketing Plans Do they closely tie in to sales projections? How did you select your “marketing mix”?
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Session 2 Homework Review
Develop a draft Operating Plan Develop draft Sales Projections Develop a draft Marketing Plan
How did you do? Trouble spots? How to move forward
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Where We Are and What’s Left Executive Summary – discussed in Session 1 Business Description – discussed in Session 1 Product/Service Description – discussed in Session 1 Marketing Plan – discussed in Session 2 and tonight Operations Plan – discussed in Session 2 and tonight Financial Plan – tonight Funding Your Business - tonight Attachments/Supporting Documents – next week Milestone Driven Planning – next week Finishing your Business Plan and Next Steps – next week
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Building the Business Model
Cost Projections Sales Projections
Pro Forma Financial Statements
Operating Plan Marketing Plan
Financial Plan
What will it cost to produce your product or service?
What will it cost to sell any given amount of your product or service?
How will your business make money? How much? For how long? Risks?
Industry, Buyer & Competitor
Analyses
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Timing Example - Operations, Marketing, and Sales Interactions in the Financial Statements
Operating Expenses
Marketing Expenses
Revenues (Sales)
January February March April May June
Fictional example for illustration purposes only!
Sales Related Operating Expenses
Fulfillment Related Operating Expenses
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Book RecommendationThe Interpretation of Financial Statements by Ben Graham
“Highly practical and accessible, it is an essential guide for all business people…”
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The “Big Three” - Financial Statements Income Statement (aka “P&L”)
Lists your income, expenses, and net income (or loss) for a given period, usually one year.
Balance Sheet A “snapshot” of the net worth of your company, listing assets
and liabilities. Important to note that balance sheets don’t tell you about the ups and downs of the year, only how things were as of a certain date, usually December 31.
Cash Flow Statement/Plan Outlines the regular inflow and outflow of cash in your
business on a month-to-month basis.
These sections make up your “pro forma” financial statements.
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Other Areas of the Financial Statement Break Even Analysis
Shows at what point your company begins to make money. Online calculator at “http://dinkytown.com/java/BreakEven.html”
Sensitivity Analysis Shows the impact of unplanned results on your business
(higher or lower costs, sales, etc.)
Funding Schedule Details the amounts of money you expect to need and when
Staffing Plans Details the titles, salaries/benefits, and timing of hiring for
people you’ll be adding to the company.
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Financial Assumptions Key sales and cost drivers Basic information about the market and
opportunities in the environment Start with:
Unit sales projectionsPricesCost projections – fixed and variableKey drivers for each
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Financial Projections “Pro Forma” financial statements
Income Statement – revenue minus expenses Balance Sheet – assets and liabilities Cash Flow Statement – actual cash on hand
Critical to you, essential to others Predictions of business performance Financing requirements Sources and uses of cash
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Constructing Credible Financial Statements
Important first step: educated assumptions
What are the key revenue drivers? What are the key cost & expense
drivers?
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Assumptions – Revenue
Market size and opportunity Number of potential customers Your particular business cycle Product/service pricing Sales growth curve Avoid the “moving hockey stick”!!!
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Assumptions – Cost of Sales/Goods Sold
Direct inputs to delivery of service Direct inputs to delivery of product Examples: materials, parts, labor,
shipping
a/k/a – variable costs
Not your expenses
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Gross ProfitGross Profit
+ Revenue- COGS
= Gross Profit Margin (GPM)
a/k/aOperating Profit = $ earned before
overhead expenses
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Expenses and Cash Flow
+ Operating Profit
- Expenses
= EBITDA
• salary • rent • utilities• telephone• marketing• legal
i.e., “keeping lights on”
a/k/a fixed costs
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EBITDA
Earnings Before Interest TaxesDepreciation Amortization
• a/k/a Free Cash Flow• Businesses valued as a multiple of EBITDA
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How Much Money Do I Need?
1. Prepare detailed Income Statement2. Then Balance Sheet3. Then Cash Flow Statement
Monthly negative Cash Flow = operating cash
Cumulative negative Cash Flow = total needed
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Balance Sheet A “snapshot” of the net worth of your company,
listing assets and liabilities. Important to note that balance sheets don’t tell you about the ups and downs of the year, only how things were as of a certain date, usually the end of the month or the end of the year.
Spreadsheet Exercise
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Cash Flow Statement/Plan Outlines the regular inflow and outflow of cash in
your business on a month-to-month basis.
Spreadsheet Exercise
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EXAMPLE: Startup Jewelry Distribution BusinessHow much do they need?
MONTH
($000) 1 2 3 4 5 6 7 8 9 10 11 12 TOTALS
Revenue 0 0 0 0 0 3 3 7 7 38 38 42 138
Expend-itures
17 5 8 8 9 9 11 19 19 33 42 40 220
Cash Flow (17) (5) (8) (8) (9) (6) (8) (12) (12) 5 (4) 2 (82)
Cumulative (17) (22) (30) (38) (47) (53) (61) (73) (85) (80) (84) (82)
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Income Statement (aka “P&L”) Lists your income, expenses, and net income (or
loss) for a given period, usually one year.
Spreadsheet Exercise
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Break Even Analysis Shows at what point your company begins to
make money. Online calculator at
“http://dinkytown.com/java/BreakEven.html”
Spreadsheet Exercise
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STRATEGIC BUSINESS PLANNING
Sensitivity Analysis Shows the impact of unplanned results on your
business (higher or lower costs, sales, etc.)
Spreadsheet Exercise
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Funding Schedule Details the amounts of money you expect to need
and when Typically tied to milestones and achievements Allows investors to decide on a commitment level
January 2004 - $250,000 for start up expenses
June 2004 - $75,000 for advertising and marketing
March 2005 - $175,000 for expansion to 2nd location
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Staffing Plans Details the titles, salaries/benefits, and timing of
hiring for people you’ll be adding to the company.
Title Hire Date Salary Benefits Bonus Total ExpensePresident January-04 $80,000 $26,400 $15,000 $121,400Machine Operator January-04 $35,000 $11,550 $2,000 $48,550Machine Operator April-04 $35,000 $11,550 $2,000 $48,550Shipping Clerk April-04 $24,000 $7,920 $1,200 $33,120Salesperson June-04 $30,000 $9,900 $3,000 $42,900Salesperson June-04 $30,000 $9,900 $3,000 $42,900Salesperson October $30,000 $9,900 $3,000 $42,900Totals $264,000 $87,120 $29,200 $380,320
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- 10 Minute Break -
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Funding Your Business Types of Investors
Venture Capital and Angel Investors
Valuation of Early Stage Companies
What You Give for What You Get - Examples
Alternative Sources of Funding for Your Business
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Getting to the Investment Requirements and Pre-Start Valuation
Draft the business plan narrative sections – tell your story! Run the numbers – does the story hold up?
Income Statement Balance Sheet Cash Flow Statement/Plan
Determine funding needs from the Cash Flow Projections Examine “pro-forma” EBIDTA projections at 5 years Determine if the ROI fits the Angel Investor targets If so, begin “pitching your plan” to prospective investors! If not, you can either rework the plan, or… Go to alternative funding sources and/or self-fund the plan
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Comparing Venture Capital and Angel InvestorsVenture Capital Firms Typically do not
invest in start-ups Responsible for
about 10% of all start-up funding
Angel Investors Provide about 90%
of the seed and early stage outside equity capital for start-up entrepreneurs
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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Comparing Venture Capital and Angel InvestorsVenture Capital Firms Operate like mutual
fund companies General partners
such as managers, analysts,etc.
Limited partners are pension funds, corporations, etc.
Angel Investors Loosely formed
groups or wealthy individual investors
“Tried and true” entrepreneurs
Typically have invested in several companies
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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Comparing Venture Capital and Angel InvestorsVenture Capital Firms Typically invest in
rounds valued at $7MM or more
Average investment in the $2MM range
Later stage interest
Angel Investors Typically invest in
rounds valued between $250K and $2MM.
Average investment per individual of $25K to $250K
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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Comparing Venture Capital and Angel InvestorsVenture Capital Firms Invested ~$20B in start-
ups last year About 3,000 deals About 700 investors Averaged about $7MM
per round 2 or 3 investors per
round
Angel Investors Invested ~$30B in start-
ups last year About 50,000 deals 400,000 investors Averaged about $750K
per round 6 to 10 investors per
round
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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Venture Capital and Angel Investors
Stage
Primary Interest
Control Level
AssistanceProvided
Process Length
Exit Timeline
Where they Invest
Later stage
The Business
Significant Control
Executive Team SelectionFinancial Management
6 to 12 months
3 to 5 years
Regional/National
Early stage
The Individual
Support and Influence
Hands-on AdvisorNetworking Help
2 to 4 months
Up to 10 years
Strictly local
Venture Capital Firms Angel Investors
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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How Angels Evaluate Start-ups…
Quality of the management team…………Size of the opportunity……………………..The product or service……………………..Sales channels……………………………..What stage the business is in…………….How much money you’re trying to raise…..Need for funding in future rounds………….Quality of your business plan………………
0-30%0-25%0-10%0-10%0-10%
0-5%0-5%0-5%
The Management Team’s experience, intelligence, drive, and personalities are typically the most important criteria for AngelInvestors, followed by the overall size of the opportunity.
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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Valuation of Pre-Start Companies
Total amount of money raised
Pre-start value of the company
Amount of ownership (percentage)taken by Angel Investors
Expected ROI in five years
“Real world” performance; how many Investments in start-up companiesactually return between 10X and 30X?
$250,000 to $1,000,000(raised in total from multiple angel investors)
$1,000,000 to $4,000,000
20% to 40%
30X return on investment
About 10%
The typical Angel Investor opportunity looks like this:
Source: Ewing Marion Kauffman Foundation – www.emkf.org
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Valuation Walk-through - Example 1
Total amount of money raisedTotal number of Angel Investors - Amount invested per Angel InvestorExpected 5-year return on investment
Pro forma 5-year EBITDA estimateValuation (comparable) multiple*Projected 5-year value of company
Ownership percentage required by Angel Investors at five-year exit horizon
Current (pre-money) valuation of company* alternatively, does 1x revenue in Year 5 equal 30x investment?
$250,0005
$50,000$7,500,000 (30X)
$5,000,0006 times earnings
$30,000,000
25%
$1,000,000
Here’s how a deal might be structured:
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Where the Numbers Come From…Total amount of money needed/raisedTotal number of Angel Investors - Amount invested per Angel InvestorExpected 5-year return on investment
Pro forma 5-year EBITDA estimateValuation (comparable) multipleProjected 5-year value of company
Ownership percentage required by Angel Investors at five-year exit horizon
Current (pre-money) valuation of company
$250,000 - Cash Flow Projections
5 - Based on avg. AI investment $50,000 - Specific AI profiles
$7,500,000 (30X) – Roughly 100% ROI per year
$5,000,000 - Income Statement
6 times earnings - Industry research
$30,000,000 - multiply
25% - Projected 5-year value of the company divided by the AI’s expected
5-year return amount
$1,000,000 - Amount of money raised
divided by the AI’s required ownership percentage
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Expected Return Depends on Time To Exit/Harvest…
Expected 5-year return on initial $250,000 investment
$7,500,000 (30X) Roughly 100% ROI per year
End of Year 1 - $250,000 plus 100% return = $500,000 (current value of investment)
End of Year 2 - $500,000 plus 100% return = $1,000,000End of Year 3 - $1,000,000 plus 100% return = $2,000,000End of Year 4 - $2,000,000 plus 100% return = $4,000,000End of Year 5 - $4,000,000 plus 100% return = $8,000,000 (32X)End of Year 6 - $8,000,000 plus 100% return = $16,000,000End of Year 7 - $16,000,000 plus 100% return = $32,000,000End of Year 8 - $32,000,000 plus 100% return = $64,000,000End of Year 9 - $64,000,000 plus 100% return = $128,000,000End of Year 10 - $128,000,000 plus 100% return = $256,000,000
And so on… every $1 invested 10 years ago turns into $1,024!!!
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Valuation Walk-through - Example 2
Total amount of money neededTotal number of Angel Investors - Amount invested per Angel InvestorTotal expected 5-year return on investment
Pro forma 5-year EBITDA estimateValuation (comparable) multipleProjected 5-year value of company
Ownership percentage required by Angel Investors at five-year exit horizon
Current (pre-money) valuation of company
$250,0005
$50,000$7,500,000 (30X)
$1,000,0006 times earnings
$6,000,000
125%
--
Here’s an example of a “no go” for angel investors:
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Valuation Walk-through - Example 3
Total amount of money neededTotal number of Angel Investors - Amount invested per Angel InvestorTotal expected 5-year return on investment
Pro forma 5-year EBITDA estimateValuation (comparable) multipleProjected 5-year value of company
Ownership percentage required by Angel Investors at five-year exit horizon
Current (pre-money) valuation of company
$1,000,00040
$25,000$30,000,000 (30X)
$8,000,0009 times earnings
$72,000,000
41.67%
$2,400,000
Can you find the potential problem in this example?
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Valuation Walk-through - Example 4
Total amount of money neededTotal number of Angel Investors - Amount invested per Angel InvestorTotal expected 5-year return on investment
Pro forma 5-year EBITDA estimateValuation (comparable) multipleProjected 5-year value of company
Ownership percentage required by Angel Investors at five-year exit horizon
Current (pre-money) valuation of company
$300,0004
$75,000$9,000,000 (30X)
$15,000,0005 times earnings
$75,000,000
12%
$2,500,000
Can you find the potential problem in this example?
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Finding Angel Investors…Starting points for finding Angel Investors and other resources…
Wharton SBDC Websitehttp://whartonsbdc.wharton.upenn.edu
Innovation Philadelphiahttp://www.IPphila.com
Inc.com (“Inc. Magazine”) Website http://www.inc.com/guides/finance/20797.html
Google Search EngineEnter these terms - “angel investors” Philadelphia
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Alternative Funding Sources…
Suppliers and Customers Personal Funds and “Bootstrapping” Friends and Family Private Equity Debt
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Suppliers and Customers
Suppliers allowing deferred payments A “float” from suppliers Customers offering advance payment Advance ordering and order guarantees
If you don’t ask, you won’t know if you can get it!
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Personal Funds and “Bootstrapping”
Cash savings Converting assets “Sweat equity” The “apple cart” approach
Try to think like an impartial investor even when ESPECIALLY when using your own money!
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Friends and Family
Traditional startup funding sources The investment they make is in YOU! Business metrics usually less important Usually a higher tolerance for problems
Written agreements still very important! Consider the potential impact on relationships if the business is not successful and the investment is lost!
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Private Equity Sophisticated “Angel Investors” Professional investors – typically take a
sole investor position in startups Minimal margin for error and a low
tolerance for underperformance Generally reserve the right to replace the
management team if projections aren’t met! Contracts tend to be complex with lots of strings
attached to investment
Talk with other companies they’ve invested in!
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Debt Financing
Local banks Small Business Administration loans Credit cards Borrowing against home equity Borrowing against insurance policies Borrowing against your retirement IRA
Be aware of the risks and consequences!
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Rules for External FinancingRule # 1 – Try to use other people’s money (OPM)
Rule # 2 – Let your customers and suppliers finance the business to the greatest extent possible
Rule # 3 – Use money you can afford to lose or can emotionally handle losing
Rule # 4 – Get money as inexpensively as possible
Rule # 5 – A smaller percentage of something big is worth more than 100% of nothing!
Rule # 6 – Seek advice from advisors, i.e. lawyer, accountant, consultants, family, etc.
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Homework Assignments Develop a draft Financial Plan
Use the discussions from this evening to build a integrated financial plan for your business.
Revise and refine Financial Projections Based on your operating, marketing, and sales expenses,
how much money will the company need to get started, what are your cash flow projections, and how much money will the business make and when?
Complete the Operating Plan Go back into your narrative plan and adjust your story based
on the realities of your financial plan.
Questions about the assignments?
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Next Session (Session 4) Attachments and Supporting Documents
Other things to include in your blockbuster plan
Milestone Driven Planning How to stay on track and build confidence among investors
Bringing It All Together We’ll walk through plans from participants in our class, discuss
strength’s and weaknesses, try to highlight areas that need additional work. We’ll use the templates from Sessions 1-3 to evaluate the plan.
Next Steps Staying focused, accessing additional SBDC resources, finding and
using an expert advisory board.
See You Next Week!