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i business process management
If the company hasn't sent you a business
plan, or if you haven’t met with the company’s management team, it would
be foolish to send them a check! In addition to meeting your criteria, a
company's business plan should take into account a score or more of
other considerations that you need to evaluate in your appraisal.
A short article can’t cover all the issues, nor can it give you a
detailed assessment of each item you need to appraise, but here are four
topics that you should review while evaluating a business plan.
- Examine the business plan for
inaccuracies. Are any of the statements in the plan inaccurate? If
you find one inaccuracy, there are likely to be more. If the
misstatement is serious, it could lead to your rejection of the
company's business plan.
- Know the value of the business.
Every business has a value, even if at best it consists of the
startup or initial investment of the owner or others. An operating
business is valued based upon discounted cash flow. A profitable
business is valued upon its profit. You can use formulas, which you
can find on the Internet or at your local library, to do a business
appraisal. Once you know the value of the business, you can compare
its value to the money being sought by the company.
If the company is worth a half million dollars, and it is seeking a
half million dollars from investors, and offering half the equity in
the company for your money, it's a fair deal. If the company is
worth a half million dollars and it is seeking five million dollars
for a 50 percent equity in the business, it is not offering a fair
deal for the investors. On the other hand, if the company is worth a
half million dollars and it is seeking a hundred thousand dollars
for a half interest in the company, be extremely suspicious of the
offer.
- You are risking a capital
investment. Read the company's business plan to find out how the
company proposes to protect your investment and insure you against
the loss of your investment. You can limit the amount of risk in
several ways. The simplest way is to have the business plan convert
your investment into a series of steps, with each step producing a
verifiable outcome. For example, the first step to finance a million
dollars could involve buying and installing two new machines for
$325,000 each that would double production and consequently double
the company's gross revenues. If your investment is escrowed with a
lawyer and the two new machines are paid for from this account, you
could lose $650,000. However, the first step must be accomplished as
the business plan states or you can't lose the money. If a business
venture doesn’t work out, you are better off losing only some of
your money rather than losing all of it.
- What does the business plan state as
the company's exit strategy and how long will it take to reach it?
You need to evaluate the odds of the exit strategy working
successfully. In addition, you must adjust your return on investment
by taking taxes and inflation into account. If you fail to do this,
the business plan could still work and the exit strategy could be
real, but you could also still lose money on your investment.
Doubling your money in ten years is a losing strategy because at
least 15 percent of your profit will go to taxes and the rest,
combined with the original investment, will buy less than a decade
ago thanks to inflation.
Just because something is in writing, it
doesn’t mean that it’s true. If a business plan is true, the company’s
offer still may not have been written with the best interests of the
investor at heart as a primary consideration. You can expect to require
changes in the contract before you agree to risk your money. The changes
you make should increase your odds of making a profit while reducing
your risk of loss.
If you need help to evaluate a business plan, you should find a
competent expert to review it. It is hard to find worthwhile business
investment opportunities. If you've found a potentially profitable
speculative investment, it never hurts to ask for an expert second
opinion.
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