There are 5 “sharks”, each is a business mogul who at one point sold their company or currently owns a very large company.   The sharks are an interesting bunch rejecting investments, undercutting each other, or working together to get a piece of the action.  They are a fairly well rounded group with backgrounds varying from real estate to clothing to computer software.  They are fun and entertaining to watch and certainly are on top of their game.

Many times entrepreneurs come on the show having no idea what their business is worth.  One may come on the show with $10,000 in sales and want to sell 10% of their company for $50,000.  The pre-money valuation (what the company is worth before investment) is $450,000!  I can understand going in low to get the valuation you really want but that is 45X sales!  (Normally you will get around 4-6x sales, though that can change up or down depending on many variables).

If the entrepreneur can start a feeding frenzy they normally trade a much smaller portion of their company.  However, if only one shark is interested in their company and the entrepreneur is not prepared they may walk out having just sold 100% of their company.

Watching the show one can’t help but wonder a few things.  Do the entrepreneurs do any research into what their company might be worth?  Are the sharks taking advantage of them?  Considering many of these sharks are so wealthy, will they even spend significant time on a $50,000 investment that could potentially return them $500,000 (a home run 10X your investment)?

Here is a few tips for anyone going on that show, trying to raise money or negotiating deals with their company.

1. Understand what a Pre-Money valuation is and have a reasonable estimate of your companies worth.
2. Do not low ball, provide good reasoning for your companies valuation.  It will make you look more professional and give an added dimension of respectability to your investors.
3. If you don’t like the deal, counter by stating your rationale in #2 followed by a new proposal.  DO NOT ASK IF THEY WILL TAKE A DIFFERENT OFFER!  You need to be vested in the company as well so that your goals and any investor goals are alligned.
4. Do not be afraid to sell the company and walk away.  If you are going to get an outstanding return on your investment (3x-10x depending on your investment amount).  You may want to cash out and enjoy life or do something new.  This is one area where a royalty for life is wonderful!
5. Say NO.  If you don’t like the deal just say NO.  You brought the company this far are you prepared to take it even further?  A bad investor is a bad deal and keeping all your equity and moving forward while tough can be a good choice for you.
6. Have an exit strategy, know what your long term goals are and what you want from life.

Spending your time to know some basics about what your getting yourself into and how to leverage it will give you the potential to make the most of your capital and give you the best shot at success.

Capital Cents can provide your business the same services for a fraction of the cost outlined in the article.

Contact Us today!!!

The first step to a break even analysis is to have a good tracking and records management in a spreadsheet.  Understand where all your costs are coming from and the impact each cost has.  Costs can be variable or fixed and you should take both into account in your break even analysis.  A fixed cost is something that does not change in a given year, such as insurance, employees paid via yearly salary and rent, these are normally the easiest to deal with.  A variable cost is something that changes with quantity or time, commissions on sales are a variable cost, materials are almost always variable (as the price changes daily with supply and demand), and hourly employees.

After your costs are understood and accounted for you need to do the same for your revenue sources.  Now if you sell a service or good you can figure out exactly how much you need to sell to cover you costs.  Of course just covering your costs isn’t the goal of any business but in this tough economic climate staying alive while our economy slowly rebuilds is great for you, your employees and your customers.

Capital Cents are experienced providing break even analysis for our clients.  If you need help Contact Us today!

• Data Analysis – No data set is too big or too small, we will show you how to optimize your data by collecting, manipulating and creating metrics that measure it.  The data from your website, financial statements, market, or even scientific data is valuable and we can help ensure you are making the most of it.

• Financial Modeling – Let us provide “what if” scenarios by modeling your theories, operations, capital requirements, or industry trends.  Each of our models is tailored to specifically meet your company’s requirements and we create easily updated or automated models utilizing Excel.

Check our new section on what service Capital Cents offers and how it can help you business!

No company is without some type or types of capital, you just need to figure out the best way to leverage it in return for money or greater opportunities.  Your company could have a wealth of intellectual property, employees, production capabilities, cash (the end goal for most companies), or something else.  Remember, your looking for anything you have an abundance of which can be exchanged for more of something else.

So how can you make the most of your capital?

A SWOT analysis stands for Strengths, Weaknesses, Opportunities, and Threats and it can be used to look at your competitive landscape.  A word of warning, you must be able to look honestly at your business, take an outsiders vantage point or hire an outside consultant to help.

Start your SWOT analysis by taking a blank  piece of paper or Word/PowerPoint document.  Now label it with your business name at the top, next draw a line down the middle from the Top to Bottom and another line from Left to Right.  Now you have four boxes with the name written of your business written on top.  Similar to this…

Strengths and Weaknesses are internal to your company or if you are analyzing this from a competitor stand point (pretend you are sitting in your competitors shoes).  In the Strengths section list several things your company does well or has a competitive advantage in, things that your competitors would like to mimic or do better than you.  Weaknesses are things your company needs to work on such as a weak brand or poor management.  Take an honest look at your weaknesses, it can be very tough for a business owner or manager to make an accurate list of weaknesses .

Now you are ready to move on to the extrenal factors, Opportunities and Threats.  Opportunities are anything that you can’t necessarily control but can potentially exploit.  A few examples would be is the government about to provide a stimulus in the way of cash or tax breaks for a certain product or service, what about a new distributor that you know is about to offer a new product, a final example to think about is new technological advances that could save you money or time.  Think about a Threat as something that could potentially cause some serious problems to you and your company.  Do you believe a competitor has a pricing advantage (lower price point and more room in their margins), new unfavorable taxes for your product or service, or your customers are shifting away slowly to a better product or service.

With this information you can start to see different areas you can exploit to your advantage or plug a glaring hole in your company.  Another word of caution two people in your company could potentially come up very different SWOT analysis, so keep that in mind.  However, at least you have taken the first step to begin to understand your companies position as well as that of your competitors.

If your business can survive this bad economic climate when the corner is turned; your company will be in much stronger position.  Over 80% of finance executives are spending more time on forecasting and other financial metrics.  These forecasts allow your company to run various “what if” scenarios to assess the impact of the changing economic environment both today and in future years.  To make your forecast as accurate as possible follow these tips.

• Hire experienced forecasters
• Gather information and data
• Use and work from your budgets
• Have accurate Net Income and Balance Sheets
• Understand your cash flow

So Contact Us today, Capital Cents has been providing forecasts for large and small companies for over 5 years.  Let us help you gain financial control of your company and help move your company through this tough economic climate.

Capital Cents was called in to help the owners of the company create a valuation and form a strategy to present their case to potential buyers for either the whole company or pieces of it.  After sitting down with the owners we came to the conclusion that they had three divisions that they could sell.

1. Future Maintenance Fees
2. A new product which was about 75% complete
3. Other Assets

The owners and Capital Cents reviewed the yearly inflow of revenue from the maintenance fees and took into account any costs associated with keeping the customer happy.  After that we created a present value of those cash inflows by estimating a rate of return.  Going through this exercise gave the owners the opportunity and insight into not only their own business but also allowed them the unique perspective of viewing it from a buyers perspective.  It was a real eye opener for them because for the first time they were seeing a number to value what those future cash inflows were worth today.

Stay tuned to follow our process through valuing the new product and other assets.

Our first example of what Capital Cents can do for you and your company.

Contact Us Today!