One of the first things potential investors examine is whether a plan’s forecasts and assumptions are reasonable. Experienced investors can usually determine this fairly quickly.If they think the figures are reasonable, they will perform analytical review procedures,which may include the following:
Operating Margins Investors calculate your operating margins (gross profit and pretax profit) and research and development, marketing, and general and administrative expenses as a percentage of sales, and compare these percentages with those of other companies in your industry. If you forecast a gross margin of 65% in an industry where other companies are realizing only 50%, prospective investors will question your assumptions and your rationale. If you feel that your figures are correct, you should be prepared to defend them with supporting data.
Asset Management This is an area that many executives overlook. Your forecasted balance sheets should demonstrate that you understand how to manage cash, receivables, and inventory. Such evidence is extremely important to potential investors and bankers alike.Your forecasts and ratios should be generally comparable to those of other companies in your industry. Various industry guides and studies are available for making these comparisons.
Company Valuation Investors will often “ballpark” a company’s value by looking at your
forecasted earnings at the end of a certain period (usually three to five years) and multiplying those earnings by a factor that is relevant to your industry. No general standards exist. If yours is a growth industry, investors may use an earnings multiple of 10 to 20. If yours is a consumeroriented business, investors may use a multiple of 5 to 10. This multiple helps estimate the future value of your company. The investors discount this future value using a risk-adjusted rate of return to arrive at their estimate of the current valuation.
For example, if you forecast annual sales of $40 million at the end of five years with a 15% after-tax profit, and you are in a growth industry, investors might multiply your forecaster
profit ($6 million) by 10 and come up with a value of $60 million. This is the value one could assume for your company if it went public or were sold to a third party.Investors, in particular,need to know this figure for two reasons:
(1) they want to be sure that your company will be large enough someday to make their investment worthwhile, and
(2) they use this figure to help determine the percentage of ownership in the company they require in exchange for the amount of cash you are trying to raise.
Operating Margins Investors calculate your operating margins (gross profit and pretax profit) and research and development, marketing, and general and administrative expenses as a percentage of sales, and compare these percentages with those of other companies in your industry. If you forecast a gross margin of 65% in an industry where other companies are realizing only 50%, prospective investors will question your assumptions and your rationale. If you feel that your figures are correct, you should be prepared to defend them with supporting data.
Asset Management This is an area that many executives overlook. Your forecasted balance sheets should demonstrate that you understand how to manage cash, receivables, and inventory. Such evidence is extremely important to potential investors and bankers alike.Your forecasts and ratios should be generally comparable to those of other companies in your industry. Various industry guides and studies are available for making these comparisons.
Company Valuation Investors will often “ballpark” a company’s value by looking at your
forecasted earnings at the end of a certain period (usually three to five years) and multiplying those earnings by a factor that is relevant to your industry. No general standards exist. If yours is a growth industry, investors may use an earnings multiple of 10 to 20. If yours is a consumeroriented business, investors may use a multiple of 5 to 10. This multiple helps estimate the future value of your company. The investors discount this future value using a risk-adjusted rate of return to arrive at their estimate of the current valuation.
For example, if you forecast annual sales of $40 million at the end of five years with a 15% after-tax profit, and you are in a growth industry, investors might multiply your forecaster
profit ($6 million) by 10 and come up with a value of $60 million. This is the value one could assume for your company if it went public or were sold to a third party.Investors, in particular,need to know this figure for two reasons:
(1) they want to be sure that your company will be large enough someday to make their investment worthwhile, and
(2) they use this figure to help determine the percentage of ownership in the company they require in exchange for the amount of cash you are trying to raise.
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