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Ppt 2

  1. 1. START-UP COSTS and CAPITAL SOURCES by Jim Chamberlain Management Counselor [email_address]
  2. 2. START UP COSTS <ul><li>IF YOU DON’T HAVE ENOUGH CASH TO START YOUR BUSINESS RIGHT, WAIT UNTIL YOU CAN. </li></ul><ul><li>BUSINESS PLAN WILL HELP </li></ul><ul><ul><ul><ul><ul><li> Gateway Business Bank </li></ul></ul></ul></ul></ul>
  3. 3. START-UP COSTS and CAPITAL SOURCES <ul><li>START-UP CASH INVESTMENT </li></ul><ul><ul><li>FIXED CAPITAL INVESTMENTS </li></ul></ul><ul><ul><ul><li>START UP </li></ul></ul></ul><ul><ul><ul><li>GROWTH </li></ul></ul></ul><ul><ul><ul><li>MAINTENANCE </li></ul></ul></ul><ul><ul><ul><li>WORKING CAPITAL INVESTMENTS </li></ul></ul></ul><ul><ul><ul><li>START UP </li></ul></ul></ul><ul><ul><ul><li>GROWTH </li></ul></ul></ul><ul><ul><ul><li>MAINTENANCE </li></ul></ul></ul><ul><ul><ul><li>CASH OUTLAYS UNTIL BREAKEVEN </li></ul></ul></ul>
  4. 4. START-UP COSTS and CAPITAL SOURCES <ul><li>FIXED CAPITAL – How do you calculate how much your business needs at start-up and to maintain growth? Do not confuse the justification with how it will be financed. Justify first, then determine how to finance the investments. </li></ul><ul><li>SALES FORECAST – 24 to 36 months </li></ul><ul><li> How much “capacity” investment is required? </li></ul><ul><li> How fast will you grow? New products or services? </li></ul>
  5. 5. START-UP COSTS and CAPITAL SOURCES <ul><li>WORKING CAPITAL INVESTMENTS – The excess of current assets over current liabilities or the amount of cash required to fund the business on a day-to-day basis. An indication of short-term financial strength. Don’t be under-capitalized . </li></ul><ul><li>No business has ever failed because they had too much working capital. </li></ul><ul><li>Working Capital = CURRENT ASSETS minus CURRENT LIABILITIES </li></ul>
  6. 6. <ul><li>START-UP COSTS (INVESTMENTS ) </li></ul><ul><li>FIXED CAPITAL </li></ul><ul><li>Office Furniture $ 2,000 </li></ul><ul><li>Vehicles 20,000 </li></ul><ul><li>Tenant Improvements 10,000 </li></ul><ul><li>Printing Machines 20,000 </li></ul><ul><li>Total Fixed Capital – start-up $52,000 </li></ul><ul><li>Vehicles $ 20,000 </li></ul><ul><li>Printing Machines 10,000 </li></ul><ul><li>Total Fixed Capital – Year Two $ 30,000 </li></ul>
  7. 7. START-UP COSTS (INVESTMENTS) <ul><li>WORKING CAPITAL </li></ul><ul><li>Start-up </li></ul><ul><li>Operating Cash $ 10,000 </li></ul><ul><li>Inventories 15,000 </li></ul><ul><li>Prepaid Rent 5,000 </li></ul><ul><li>Prepaid Insurance 8,000 </li></ul><ul><li>Total Working Capital – start-up $ 38,000 </li></ul><ul><li>Cash losses – first six months $ 25,000 </li></ul><ul><li>Total Working Capital – Year One $ 63,000 </li></ul><ul><li>Required Working Capital – Year Two $ 10,000 </li></ul><ul><li>(Based on a $50,000 increase in sales) </li></ul>
  8. 8. CAPITAL SOURCES <ul><li>HOW BUSINESS ARE REALLY FUNDED </li></ul><ul><li>Seed Cash – Percentage of Inc 500 CEOs </li></ul><ul><li>surveyed (2002) who launched their company with seed </li></ul><ul><li>capital (including personal assets) of: </li></ul><ul><li>Less than $1,000 14% </li></ul><ul><li>$1,000 - $10,000 27% </li></ul><ul><li>$10,001 - $20,000 10% </li></ul><ul><li>$20,001 - $50,000 15% </li></ul><ul><li>$50,001 - $100,000 12% </li></ul><ul><li>More than $100,000 22% </li></ul>
  9. 9. CAPITAL SOURCES <ul><li>EQUITY FUNDING – Financing your business by selling a minority equity interest. This cash is less risky but more expensive. Valuation issues must be addressed . Initial and target valuation calculations must be made. </li></ul><ul><li>43% of founders started the company alone. </li></ul><ul><li>The rest had: 1 partner 12% </li></ul><ul><li>2-3 partners 36% </li></ul><ul><li>4+ partners 9% </li></ul>
  10. 10. CAPITAL SOURCES <ul><li>Private Equity and Venture Capital funding </li></ul><ul><li>Angel investors tend to like proprietary products and </li></ul><ul><li>non-capital intensive businesses. They anticipate future </li></ul><ul><li>rounds of financing. Angel investors look for: </li></ul><ul><li>Market niches – potential to dominate or be #1 or #2 in the industry </li></ul><ul><li>Advanced technology and a disruptive model (going to change things) </li></ul><ul><li>Compelling and sustainable advantage – not “me too” </li></ul><ul><li>Planned exit in 4-6 years </li></ul><ul><li>Reasonable valuation </li></ul><ul><li>Performance equal to 5 -10 times original investment </li></ul><ul><li>ROI equal to 20-40% per year </li></ul><ul><li>Sitting on your board but not having control </li></ul><ul><li>Higher risk business models </li></ul><ul><li>Angels spend, on average, 51 hours on due diligence per investment </li></ul>
  11. 11. CAPITAL SOURCES <ul><li>BANK LOANS or DEBT FINANCING </li></ul><ul><li>Banks will loan 2.5 – 4.0 times Cash Flow – usually based on EBITDA </li></ul><ul><li>Banks would like to see a 3-5 year track record or a history of business experience </li></ul><ul><li>Debt is less expensive but more risky than equity </li></ul><ul><li>Banks will not lend on pure projections: You must have a history of cash flow or a current personal guarantee. </li></ul><ul><li>Three sources of repayment: </li></ul><ul><ul><li>Cash Flow </li></ul></ul><ul><ul><li>Liquidation value of assets </li></ul></ul><ul><ul><li>Personal Guarantees of each 25% equity owner </li></ul></ul>
  12. 12. CAPITAL SOURCES <ul><li>NEGATIVES TO A BANKER </li></ul><ul><li>Getting involved with something outside your normal business model </li></ul><ul><li>Absentee management / ownership </li></ul><ul><li>Divorce </li></ul><ul><li>Burnout </li></ul><ul><li>Growing beyond owner’s capacity to operate the business </li></ul><ul><li>Parent turns over business to son or daughter </li></ul><ul><li>Computer conversions </li></ul><ul><li>Relocation and / or expansion of facility </li></ul><ul><li>Companies “hit the wall” at: </li></ul><ul><ul><li>Manufacturing companies at $2 million in sales </li></ul></ul><ul><ul><li>Distribution companies at $4 million in sales </li></ul></ul><ul><ul><li>Retailers at 3 stores and distance </li></ul></ul><ul><ul><li>Service companies at 12 employees </li></ul></ul><ul><ul><li>Contractors at 2 or more big jobs </li></ul></ul>
  13. 13. CAPITAL SOURCES <ul><li>A bank would rather see a 640 FICO score with all payments as agreed (no late payments, foreclosures, repossessions, charge offs or collection accounts) than a 740 FICO score with a past foreclosure, and three previously delinquent accounts now paid. </li></ul><ul><li>Having a stable source of income to meet personal income requirements can be a significant factor in reducing business risk for a start-up. </li></ul>
  14. 14. CAPITAL SOURCES <ul><li>QUESTIONS A BANKER WILL ASK YOU </li></ul><ul><li>Do you have a Business Plan? </li></ul><ul><li>How much experience do you have in this industry? </li></ul><ul><li>How is your credit and how much personal debt do you have? </li></ul><ul><li>How much is your down payment? Is it at least 25%? </li></ul><ul><li>How much collateral do you have? </li></ul><ul><li>Who is the competition? </li></ul><ul><li>Do you have personal and business insurance? </li></ul><ul><li>Do you have services of an accountant and attorney? </li></ul><ul><li>Have you ever filed for bankruptcy? </li></ul><ul><li>Do you have 2-4 years of tax returns available? </li></ul>
  15. 15. CAPITAL SOURCES <ul><li>SBA ELIGIBILITY </li></ul><ul><li>Cannot be a business in lending, life insurance, </li></ul><ul><li>real estate development or rental property. </li></ul><ul><li>Gambling, promoting religion, pyramid sales plans, consumer marketing cooperatives and persons of poor character are ineligible. </li></ul><ul><li>Individuals must be lawfully in the U.S. </li></ul><ul><li>Business cannot be located outside the U.S. </li></ul><ul><li>Import businesses may be ineligible </li></ul><ul><li>Go to www.SBA.gov for a complete list of ineligible businesses. Also, a good resource for minority and micro-loan plans. </li></ul>
  16. 16. CAPITAL SOURCES <ul><li>MISTAKES ENTREPRENEURS MAKE WHEN RAISING </li></ul><ul><li>CAPITAL </li></ul><ul><li>Don’t understand share prices or valuations </li></ul><ul><li>Confuse broad market with served market </li></ul><ul><li>Make unrealistic assumptions about an exit strategy </li></ul><ul><li>Don’t understand long term capital needs </li></ul><ul><li>Have no clue about competition </li></ul><ul><li>Don’t understand that marketing beats technology 9 out of 10 times </li></ul><ul><li>Write a poor executive summary </li></ul><ul><li>Use “off the wall” numbers or pull numbers from thin air </li></ul><ul><li>Lack focus; e.g. many products or niches </li></ul><ul><li>Develop too simplistic of a market plan / analysis </li></ul><ul><li>Underestimate expenses </li></ul><ul><li>Rely on financial plans with major inconsistencies; e.g. numbers don’t match or tie </li></ul><ul><li>Speak in “techno-jargon”. No one understands what they are saying </li></ul>
  17. 17. CAPITAL SOURCES <ul><li>BEST WAYS TO IRRITATE AN INVESTOR </li></ul><ul><li>Lying to investors or not being forthright; omission of material information </li></ul><ul><li>Inability to answer direct questions with direct answers </li></ul><ul><li>Surprises; e.g. problem with credit checks, hidden liabilities or debts </li></ul><ul><li>Over hype or exaggerate upside </li></ul><ul><li>Your story always changes </li></ul><ul><li>Arguing with investors </li></ul><ul><li>Late for meetings </li></ul><ul><li>Excessive secrecy or legalese; expect investor to sign NDA </li></ul><ul><li>Investing capital in fancy facility and furniture </li></ul><ul><li>Fail to attract top talent </li></ul>
  18. 18. QUESTIONS <ul><li>? </li></ul><ul><li>SCORE </li></ul><ul><li>JIM CHAMBERLAIN </li></ul><ul><li>[email_address] </li></ul>