Friday, March 18, 2011

Stepping Up to Business Conf. Workshop Q&A

After the conference
Q: Should you have several different scenarios when doing financial projections / creating pro-forma financials?

A: Yes, but only if you or someone on your team (whether permanent or contracted) has the skill and acumen to do these correctly. If not, stick to providing one set of financial projections which focus solely on the probable or expected performance. Why? If the financial scenario modeling is done well, the bank or equity investor will use those as their own. If they are not done well, the model will be completely disregarded and your credibility will be undermined and perhaps even damaged.

For those of you who, like myself, are adept at building models and doing iterations of financial projections, banks and equity investors like to see three (3) scenarios: 1) Worst case; 2) Probable case; 3) Best case.
The worst case scenario is NOT when all he-- breaks lose. The worst case scenario is the most probable worst case you can think of showing the loss of one or two of your highest revenue-generating customers, a drop off in the economy and/or industry, the rejection of a highly anticipated product or service by the market, or some similar occurrence(s) Running a worst case scenario shows that you've thought about how negative situations will adversely impact your company's sales, profits, and cash flow. Doing this will also help you structure your financing to ensure you do not break a loan covenant.

The probable case is the general financial projections incorporating the assumptions you have in your strategic business plan. 

The best case scenario is when everything goes better than you have in your plan. Your new product or service could be wholly embraced by the market and grow exponentially. You could enter into a partnership that dramatically increases your customer base. Anything that you have reasonably considered that would vault your company's growth in revenue, net income, or cash flow can be part of the best case. Make sure you specify your assumptions and explain why this scenario is possible.


Q: Sometimes equity investors say "nevermind" when you ask them to sign an NDA before providing them with your business plan. Why is this and what should you do?

A: If you engage an equity investor for the first time and get them interested enough to say, "Show me what you have." or "Show me your business plan.", they will be somewhat taken aback and usually say, "Nevermind" when you ask them to sign an NDA before you hand over the business plan. Their thought process is, "You JUST told ME about YOUR business, not vice versa, and now you want me to sign something when I don't even know what your business is really about? Are you crazy? I'm doing you a big favor just to take a look at your document and you want me to jump through hoops already." (or something similar) Hence the response.

What you should provide an equity investor the first time you meet with them is a 1-page company profile. I've talked about this in previous blogs. This will provide enough enough about your company to pique the potential investor's interest. If they don't think your company is a good fit for them, they can talk to others in their network and pass on the 1-pager. That's one reason why equity investors don't like to sign anything until they are reasonably ready to commit. They constantly seek deals to invest in and part of that is getting referrals from others and making referrals to others. When they sign an NDA, they are restrained from making referrals.

If the investor or someone referred to you by the investor wants to know more, then you provide your Executive Summary. There should be enough information in each section to titillate and inform an investor yet not enough that you'd be concerned about a competitor getting hold of it. If the investor now is interested in potentially investing in your company, the investor is now a prospective investor. Now you ask him or her to sign an NDA before providing them with the business plan. Do you see the difference in the approach? Those two steps - one-page company profile then Executive Summary - make a big difference.


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