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"Secrets of Internet Millionaires to get it FREE
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Business Plan Chapter 8 part 3
Bolster your Negotiation
Position In the early
1990’s, some teasingly called venture capitalists "vulture
capitalists". This is due to the significant ownership interest
sought for seemingly small amounts of capital. This would translate into
a lower overall valuation of the company. Similarities exist today. Too
many entrepreneurs are not prepared for this valuation discussion and
potentially give up equity that is not warranted. To avoid be lumped in
with everyone else, you need to have documentation as to what your
business and its intellectual property are worth. To do this,
obtain an independent appraisal of your business’s value. The
appraisal’s cost will almost always be more than repaid by being able
to negotiate a better deal. Not obtaining an
appraisal is a common shortcut, but one that is almost always a mistake.
Without a thoughtful appraisal, the percentage of stock obtained for the
investment is a random demand, usually more based on control desires
than value being sold. In these situations, the investor ends up in the
driver’s seat. Not having a solid business value also makes the owner
appear relatively unsophisticated. After all, what kind of competence is
communicated about someone who is selling a portion of his company
without knowing its value? In lieu of an
appraisal, some attempt to determine value using a simple rule of thumb
that is out-of date and/or does not consider the important and unique
attributes of the business. Such rules are expressed using a formula
such as "two times sales", "three times net assets",
or "six times earnings". These rules of thumb often come from
other transactions in which complex discussions and appraisals are
summarized at the end of the completed transaction. A summary statistic
of "x times a specific financial statistic" does not provide a
broad review of cash flows, industry information, business risks,
specific financing, and timing within capital and economic markets. All
of these are needed to establish an appropriate value. Part of this
appraisal process is building a data arsenal that supports the
valuation. When discussing the percentage of ownership to be given, the
owner needs to educate the investor with specific and credible
information. The data should include all comparable transactions and
companies from the appraisal report, studies from industry
organizations, published information about competitors, local studies
regarding business conditions, and any other information that is helpful
to assessing business risk, market opportunities and valuation results. In addition to
the specific ownership percentage, analyze what control is being given
up in the deal being proposed by the investor. Investors are not shy
about asking for control, and it can take several forms. For example,
the existence of supermajority voting can paralyze a business if the
investor will not agree with your ideas. An investor could thereby force
the sale of the business simply by not agreeing to items that are
needed. To avoid this, insist on a provision that provides that
additional funding or approval will not be "unreasonably"
withheld. In other circumstances, a change in control occurs when an
optimistic performance benchmark contained in the agreements is missed.
If not cautiously considered, a change in macro-economic conditions,
vendor performance, or short-term challenges could cause you to loose
control of your business. All of these
demands can be altered by solid research and business assessments. The
greater the risk that an investor perceives, the greater the return and
control that they will want. Competitor analysis, market studies, and
other statistics regarding important items for your business will help
funding sources properly assess their risks and will change their
demands. Admitting Weakness is a Strength If all of this
seems a bit daunting, you are right. If you do not feel a bit insecure
about any of this, especially in the beginning, then chances are you do
not appreciate the difficulties that you are facing. Get help in the
areas where your plan is weak. Our firm has expertise in finance, business appraisal, business plan preparation, operational/strategic planning and accounting. We supplement our in-house capabilities with university professors having expertise in specific areas and industries. We regularly help businesses develop, finance, and implement their business plans. Chapters: 1 2 3 4 5 6 7 8 9 10 11 Oil & Gas publications
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