BUSINESS PLAN ONCOMPUTER DATA RECOVERY SERVICE BY ADARSH KUMAR SINGH
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Executive SummaryIntroductionElectronic Detectives, Inc. helps lawyers identify, acquire, restore,and analyze electronic data in litigation. From tape restoration to harddrive imaging, our full-time, certified forensic, discovery and testifyingexperts are highly experienced in acquiring data from NT, Novell,Unix and Linux servers and PCs, among others. As testifying experts,we will help shape the field of electronic discovery.The CompanyElectronic Detectives will be a limited liability corporation registered inthe state of Delaware for tax purposes. The company has a limitednumber of private investors and does not plan to go public. Thecompany has its main offices in Portland, Oregon. The companysmain clients will be law firms requiring identification, restoration, andanalysis of electronic data.The companys private investors will own 47% of the companysshares. The rest will be owned by the senior management includingMr. David Radcliffe, (20%), Mrs. Julie Walters (10%), Mr. Brad Rinke(15%), and Mr. William Orcott (7%). All other financing will come fromloans.The ServicesElectronic Detectives has experts well versed in all commercialoperating systems such as Unix, Linux, Novell and others. The firmwill assist in 30(b)(6) depositions to produce and go on-site toinventory data and look for hidden sources. The company also plansto maintain well recorded chains-of-custody in order to protect ourclients. Our written protocols and internal procedures ensure that ourwork product withstands scrutiny in all jurisdictions. Our firm will offerdetailed written reports, presentations, and analyses to support our
conclusions. We also have a wealth of experience providing experttestimony in federal and state court.The MarketThe electronic evidence gathering business is an offshoot of thedetective industry and it is such a new segment that gathering marketdata is impossible. However, a look at the profitability of one of ourolder competitors will give the reader an idea of the profit and growthpotential of this market. Computer Forensics of Bellevue, WA hasbeen in business for four years now and has experienced explosivegrowth averaging 40% per year. The company, after significantinvestment, achieved record pre-tax returns on net worth of 65%.This is an indication of how much demand there is in the market andthe overall growth capacity. Therefore this is an excellent market toenter now and achieve a defensible position based on customersatisfaction and reputation before more competitors enter.Financial ConsiderationsWe conservatively expect to begin to make monthly profits inNovember of the first year and yearly profits by year three. In caseour predictions are erroneous, Electronic Detectives has secured anadditional $60,000 credit line. Our break-even analysis indicates weneed to complete six projects per month to cover costs. During thenext three years we expect to maintain a positive cash flow and tobegin to payoff our various loans.
Business ObjectivesThe three year goals for Electronic Detectives are the following:• Achieve break-even by year two.• Establish 40 law firm clients by end of year three.• Establish minimum 95% customer satisfaction rate.• Achieve project completion time of 10 days or less.1.2 Keys to SuccessElectronic Detectives keys to long-term survivability and profitabilityare:• Attracting the best talent in the computer science field and establishing close contacts with those institutions and firms conducting the latest R&D in computer security.• Keeping close contact with clients and establishing a well functioning long-term relationship with clients to generate repeat business and a top notch reputation.• Establishing procedures to ensure rapid, accurate retrieval of information, and client processing.1.3 MissionIt is the mission of Electronic Detectives to create a new standard inthe detective industry. With the creation of computers and the Internetfor business and personal communication and data storage, much ofneeded court evidence is now retained on computers and PDAs inthe form of personal files, emails, electronic picture formats, andother forms. Currently, there are few companies who offersinvestigative services for institutions and firms that require accurateretrieval of such information. Electronic Detectives intends to lead theway in establishing standards for customer service, accuraterecovery, timeliness, and professionalism that will allow the companyto gain significant market share and an agressive, defensible positionin the industry.
Company SummaryElectronic Detectives will be a limited liability corporation registered inthe state of Delaware for tax purposes. The company has a limitednumber of private investors and does not plan to go public. Thecompany has its main offices in Portland, Oregon. The facilitiesinclude a computer forensics lab, conference rooms and officespaces. The company expects to begin offering its services inJanuary of 2003.The companys main clients will be law firms requiring identification,restoration, and analysis of electronic data. The firm offers a widevariety of services in order to reduce costs to our clients, which canreduce overall legal fees to individuals, firms and institutions.2.1 Company OwnershipThe company will have a number of outside private investors who willown 47% of the companys shares. The rest will be owned by thesenior management including Mr. David Radcliffe, (20%), Mrs. JulieWalters (10%), Mr. Brad Rinke (15%), and Mr. William Orcott (7%).All other financing will come from loans.2.2 Start-up SummaryTotal start-up requirements are $510,750 which includes a cashaccount of $341,550 to cover initial operating expenses prior toachieving the break-even level. The majority of our financing comesfrom investors, who are providing $297,000. Current borrowing willalso provide $50,000 and there is long-term borrowing of $120,000.
Accounting and bookkeeping fees $2,000Research and Development $4,500Advertising $6,500Other $15,000Total Start-up Expenses $41,200Start-up AssetsCash Required $341,550Other Current Assets $0Long-term Assets $128,000Total Assets $469,550Total Requirements $510,750Start-up Funding
Start-up Expenses to Fund $41,200Start-up Assets to Fund $469,550Total Funding Required $510,750AssetsNon-cash Assets from Start-up $128,000Cash Requirements from Start-up $341,550Additional Cash Raised $0Cash Balance on Starting Date $341,550Total Assets $469,550Liabilities and Capital
Total Planned Investment $297,000Loss at Start-up (Start-up Expenses) ($41,200)Total Capital $255,800Total Capital and Liabilities $469,550Total Funding $510,750ServicesElectronic Detectives offers its computer forensics services in fourphases:
• Identification of pertinent data including encrypted, compressed and password-protected files.• Acquisition and restoration of data.• Analysis.• Production of reports and presentations for our clients and the relevant court.Electronic Detectives has experts well versed in all commercialoperating systems such as Unix, Linux, Novell and others. The firmwill assist in 30(b)(6) depositions to produce and go on-site toinventory data and look for hidden sources. The company also plansto maintain well recorded chains-of-custody in order to protect ourclients. Our written protocols and internal procedures ensure that ourwork product withstands scrutiny in all jurisdictions. Our firm will offerdetailed written reports, presentations, and analyses to support ourconclusions. We also have a wealth of experience providing experttestimony in federal and state court.Market Analysis SummaryElectronic Detectives will be concentrating on large law firms with aproven track record with fields in the environmental, corporate,malpractice, intellectual property rights, and general law areas. This
is because these types of companies have the greatest needs andthe highest profit margins.Profitability and growth in this little-tapped market is astounding, asevidenced by one of our major competitors, who has experiencedexplosive growth averaging 40% per year. The company, aftersignificant investment, achieved record pre-tax returns on net worthof 65%.An analysis of the market using the five forces of profitability indicatesthat there will be a short time where growth of market share andprofitability will be extremely high while demand outstrips supply. Asnew entrants move into the market this opportunity will disappear.This is the time for Electronic Detectives to create its reputation andniche in the industry.Market SegmentationFor Electronic Detectives first three years it will be concentratingexclusively on acquiring contracts with West coast law firmsemploying over twenty individuals and having a respectablereputation for at least fifteen years. This is to insure long-termcontracts with satisfied customers who can afford our services andcreate a self-generating word-of-mouth marketing campaign. Inaddition, we will be focusing on law firms that are in the followingfields of practice• Intellectual property rights;• Corporate and business law;• Environmental law;• General practice;• Malpractice.Firms such as these have high demand for electronic investigationsdue to their clients needs and work environments. The MarketAnalysis table includes all the law firms of these types in the Westcoast area of California, Oregon, and Washington.
Market Analysis Year 1 Year 2 Year 3 Year 4 Year 5
Potential Growth CAGRCustomersMalpractice 2% 103 105 107 109 111 1.89%firmsIntellectual 6% 34 36 38 40 42 5.42%property firmsCorporate firms 4% 220 229 238 248 258 4.06%General 2% 84 86 88 90 92 2.30%practice firmsEnvironmental 7% 72 77 82 88 94 6.89%firmsTotal 3.86% 513 533 553 575 597 3.86%Service Business AnalysisThe electronic evidence gathering business is an offshoot of thedetective industry and it is such a new segment that gathering marketdata is impossible. However, a look at the profitability of one of ourolder competitors will give the reader an idea of the profit and growthpotential of this untapped market.Computer Forensics of Bellevue, WA has been in business for fouryears now and has experienced explosive growth averaging 40% peryear. The company, after significant investment, achieved record pre-tax returns on net worth of 65%. This is an indication of how muchdemand there is in the market and the overall growth capacity.Therefore this is an excellent market to enter now and achieve adefensible position based on customer satisfaction and reputationbefore more competitors enter.
Within this new market, the existing rivalry among firms is very low.This is because currently demand greatly outstrips the amount ofservices available. Since this is such a growing market, competingfirms are concentrating on growing their own client base and not onmarket share or direct competitive strategies. However, the threat ofnew entrants is very high, so high that a large number of newentrants to the market is guaranteed.This is the reason why Electronic Detectives plans to be first tomarket with comprehensive services and creating industry standardsin customer satisfaction and thoroughness. Additionally, the influencethat suppliers have on this market is quite significant. The mostimportant suppliers for Electronic Detectives is specialty softwarecompanies producing file encryption/decryption software.Although our firm anticipates creating some of its own software in-house, the majority of our programs will come from the open market.Therefore, much of our success depends on the capability of oursuppliers.Competition and Buying PatternsThere are three competitors within our geographical operating area:Computer Forensics of Bellevue, WA; Techno Solutions of Pasadena,CA; and Booth & Anderson Business Consultants of Los Angeles,CA.Of these three competitors, only Computer Forensics is a direct threatto us. Techno Solutions is currently concentrating on providing thesame services for companies looking to investigate internal fraud andcomputer misuse such as banks and other financial institutions.Booth & Anderson is a general business consulting firm that offerselectronic investigation as only one of its many services, andtherefore lacks the focus to offer a comprehensive client-providerexperience.Currently Computer Forensics is going through a rapid expansionphase as it ramps up for maximum service delivery. Due to the high
demand for such services we will not have direct competition forsome time. Once new entrants become plentiful, we anticipate thatthis will change.One of the advantages to operating in this market is that clients tendto be relatively price insensitive as long as they get a professionaland satisfying experience. Therefore we expect to be able to chargea significant profit margin.Strategy and Implementation SummaryElectronic Detectives overall strategy is to capitalize on clientsbuying patterns of demanding top-quality work with an emphasis onthoroughness in investigations to reputable companies.We intend to create industry standards of excellence that will beleveraged into a significant brand image and name that will provideus with a highly defensible market position. This will allow us to havea higher profit margin than our competitors.Sales StrategyInitially, sales will be dealt with by Mr. Radcliffe and Mr. Orcott, asthey have the most number of contacts in the industry. Mrs. Walterswill handle the administrative side of sales to our clients includingcustomer service and billing. As the company grows, we expect toadd to our staff a permanent sales force to handle all aspects of oursales strategy.In the majority of cases, we anticipate that the entire project will lastabout ten days from the time we have permission to go on site. Thiswill insure good turnaround and customer satisfaction. We intend tohave close customer relations by having each job developed, scoped,sold, and fulfilled by the same people.Sales ForecastSales are based on the various contract projects we anticipateacquiring in the various market segments. Revenues are based on
average costs per project based on estimated time and complexity ofproject plus an undisclosed profit margin. The company does nothave any significant direct costs of sales.Sales Forecast Year 1 Year 2 Year 3
SalesMalpractice lawsuits $64,000 $100,000 $135,000Corporate/business lawsuits $72,000 $156,000 $225,000Intellectual property lawsuits $14,000 $60,000 $120,000General practice lawsuits $30,000 $75,000 $100,000Environmental lawsuits $35,000 $90,000 $135,000Total Sales $215,000 $481,000 $715,000Marketing StrategyIn order to attract clients, Electronic Detectives will offer freeconsultations or an initial contract at reduced prices to promisingfirms. These promotions will build our reputation. In addition, Mr.Radcliffe and Mrs. Walters will be traveling to six trade shows andconventions across the Midwest and Western part of the countrywhere we will have booths to advertise our services. Finally, we willbe setting up cold calls to potential clients and have half and full pageadvertisements in such publications as Nation Law Journal, TheJournal of Corporate Law, and Eisleys Law Review.The company will have four officers including our president, Mr. DavidRadcliffe. Our heart of operations will include an operations chief, Mr. Brad
Rinke, plus two other forensics analysts. Legal issues will be handled by ourin-house lawyer, Mr. Orcott, and finances and general admin by Mrs.Walter.The company plans to hire additional computer forensic analysts aswe begin to get large numbers of contracts.PersonnelMr. David Radcliffe is a former special agent of the FBI. During histwenty years with the bureau, Mr. Radcliffe worked in a variety ofdifferent departments, but starting in 1981 he transferred to andeventually headed the FBIs electronic information investigationbranch. In 1985 Mr. Radcliffe received an MBA in informationsystems from the University of Washington.Mr. Brad Rinke graduated from Penn State University with abachelors degree in forensic sciences in 1975. From 1978-1988 Mr.Rinke worked with the California State Patrol as a forensicinvestigator. In 1992 Mr. Rinke received a masters degree incomputer science from the University of Southern California. For thepast ten years Mr. Rinke has worked with Symantec, Inc. identifyingand developing computer programs to fight viruses and worms.Mr. William Orcott is a graduate of the Stanford School of Law. Forthe past eight years Mr. Orcott has worked with White, Curley, &Pineda, a top law firm in Los Angeles specializing in intellectualproperty lawsuits. Mr. Orcott will serve as the legal advisor forElectronic Detectives and will also be the senior evidence custodian,maintaining the evidence locker inventoryFinancial PlanOur financial plan anticipates two years of negative profits as we gainsales volume. We have budgeted enough investment to cover theselosses and have an additional credit line of $60,000 available if salesdo not match predictions.
Projected Profit and LossThe following table itemizes our revenues and associated costs. Weexpect to be paying higher costs in marketing and advertising thanother companies as we attempt to build sales volume. As the readercan see, we expect monthly profits to begin in November 2003 andyearly profits to occur in 2005.
Profit and Loss Year 1 Year 2 Year 3Sales $215,000 $481,000 $715,000Direct Cost of Sales $0 $0 $0Other Costs of Sales $15,800 $25,000 $65,000Total Cost of Sales $15,800 $25,000 $65,000Gross Margin $199,200 $456,000 $650,000Gross Margin % 92.65% 94.80% 90.91%ExpensesPayroll $216,000 $300,000 $340,000Sales and Marketing and $30,000 $50,000 $50,000Other ExpensesDepreciation $2,400 $2,500 $2,500Rent $24,000 $24,000 $28,000Utilities $6,000 $6,000 $6,000Insurance $12,000 $14,000 $15,000Travel $8,200 $12,000 $12,000Payroll Taxes $0 $0 $0Other $7,200 $10,000 $10,000Total Operating Expenses $305,800 $418,500 $463,500Profit Before Interest and ($106,600) $37,500 $186,500TaxesEBITDA ($104,200) $40,000 $189,000Interest Expense $17,000 $15,150 $11,450Taxes Incurred $0 $6,705 $52,515Net Profit ($123,600) $15,645 $122,535Net Profit/Sales -57.49% 3.25% 17.14%
Projected Cash FlowThe following is our cash flow chart and diagram. We do not expect tohave any short-term cash flow problems even though we will beoperating at a loss for the first two years. Our short-term SBA loan of$50,000 will be repaid in two equal payments in 2004-2005. Our$120,000 long-term loan will be paid off in ten years.
Pro Forma Cash Flow Year 1 Year 2 Year 3Cash ReceivedCash from OperationsCash Sales $53,750 $120,250 $178,750Cash from Receivables $111,075 $298,673 $481,641Subtotal Cash from Operations $164,825 $418,923 $660,391Additional Cash ReceivedSales Tax, VAT, HST/GST $0 $0 $0ReceivedNew Current Borrowing $0 $0 $0New Other Liabilities (interest- $0 $0 $0free)New Long-term Liabilities $0 $0 $0Sales of Other Current Assets $0 $0 $0Sales of Long-term Assets $0 $0 $0New Investment Received $0 $13,000 $0Subtotal Cash Received $164,825 $431,923 $660,391Expenditures Year 1 Year 2 Year 3Expenditures from OperationsCash Spending $216,000 $300,000 $340,000Bill Payments $150,401 $163,019 $242,805Subtotal Spent on Operations $366,401 $463,019 $582,805Additional Cash SpentSales Tax, VAT, HST/GST Paid $0 $0 $0OutPrincipal Repayment of Current $0 $25,000 $25,000BorrowingOther Liabilities Principal $0 $0 $0
RepaymentLong-term Liabilities Principal $0 $12,000 $12,000RepaymentPurchase Other Current Assets $0 $0 $0Purchase Long-term Assets $0 $0 $0Dividends $0 $0 $0Subtotal Cash Spent $366,401 $500,019 $619,805Net Cash Flow ($201,576) ($68,096) $40,586Cash Balance $139,974 $71,878 $112,464Projected Balance SheetThe following is the projected balance sheet for Electronic Detectives.
Balance Sheet Year 1 Year 2 Year 3AssetsCurrent AssetsCash $139,974 $71,878 $112,464Accounts Receivable $50,175 $112,252 $166,861Other Current Assets $0 $0 $0Total Current Assets $190,149 $184,130 $279,325Long-term AssetsLong-term Assets $128,000 $128,000 $128,000Accumulated Depreciation $2,400 $4,900 $7,400Total Long-term Assets $125,600 $123,100 $120,600Total Assets $315,749 $307,230 $399,925
Liabilities and Capital Year 1 Year 2 Year 3Current LiabilitiesAccounts Payable $13,549 $13,385 $20,545Current Borrowing $50,000 $25,000 $0Other Current Liabilities $0 $0 $0Subtotal Current Liabilities $63,549 $38,385 $20,545Long-term Liabilities $120,000 $108,000 $96,000Total Liabilities $183,549 $146,385 $116,545Paid-in Capital $297,000 $310,000 $310,000Retained Earnings ($41,200) ($164,800) ($149,155)Earnings ($123,600) $15,645 $122,535Total Capital $132,200 $160,845 $283,380Total Liabilities and Capital $315,749 $307,230 $399,925Net Worth $132,200 $160,845 $283,380