Great Deals

Thanks for the guest post by Jo Levy

We got some great Satellite Dish Deals when we first moved in which was a real lifesaver – I don’t know how some people do it! I can’t believe moving is so expensive between the movers and the truck and having to pay to shut off the old utilities – it really adds up if you’re not careful and you know me, I wasn’t very careful! I love being a stay at home mom but that meant after we got into the new house I was tasked with unpacking everything and turning it into a home which is far easier said than done, you know? I can’t believe it’s been three weeks and I’m still working on getting everything done…I’m not lazy, there are just a LOT of boxes to be unloaded and with my husband at work and the kids in school all day there’s only so much I can do, you know? I love that there are so many ways to decorate this house at times but right now it’s stressing me out!

Developing Realistic Financial Assumptions

Many investors skip straight to the financial section of the business plan. It is critical that the assumptions and projections in this section be realistic. Plans that show penetration, operating margin and revenues per employee figures that are poorly reasoned, internally inconsistent or simply unrealistic greatly damage the credibility of the entire business plan. In contrast, sober, well-reasoned financial assumptions and projections communicate operational maturity and credibility.

For instance, if the company is categorized as a networking infrastructure firm, and the business plan projects 80% operating margins, investors will raise a red flag. This is because investors can readily access the operating margins of publicly-traded networking infrastructure firms and find that none have operating margins this high.

As much as possible, the financial assumptions should be based on actual results from your or other firms. As the example above indicates, it is fairly easy to look at a public company’s operating margins and use these margins to approximate your own. Likewise, the business plan should base revenue growth on other firms. Many firms find this impossible, since they believe they have a break-through product in their market, and no other company compares. In such a case, base revenue growth on companies in other industries that have had break-through products. If you expect to grow even faster than they did (maybe because of new technologies that those firms weren’t able to employ), you can include more aggressive assumptions in your business plan as long as you explain them in the text.

The financials can either enhance or significantly harm your business plan’s chances of assisting you in the capital-raising process. By doing the research to develop realistic assumptions, based on actual results of your or other companies, the financials can bolster your firm’s chances of winning investors. As importantly, the more realistic financials will also provide a better roadmap for your company’s success.

Documenting Partnerships

Forging partnerships to improve market penetration has become commonplace, particularly for “new economy” businesses. And most companies proudly mention their many partnerships in their business plans.

The fact is that, regardless of whom the partnership is with, partnerships by themselves are meaningless. What are meaningful are the terms of the partnership. For instance, while it sounds great to have a partnership with a Fortune 500 company, the details of the partnership are what investors find important. For instance, investors will look poorly upon a partnership in which the Fortune 500 company earns 90% commissions on customers it refers. On the other hand, investors would look favorably upon a more equitable partnership.

Be sure to detail the specifics of the partnerships. This includes factors such as how the partnership will work, payment terms, contract length, minimum and/or maximum guarantees, the type of customer leads expected from each partner, timing of payments, etc. In addition, if partnerships are a key part of the business plan, expect prudent investors to interview the partners and scrutinize partnership contracts.

Partnerships can be a major factor in the success of growing companies, providing leads, sales, capital and/or other critical benefits. However, ventures should be careful not to place too much emphasis on any one partner in their business plan. Partnership agreements, like other legal agreements, can be breached, and if the venture positions any one partner as critical to its success, this will become a risk factor to investors.

Overall, partners can provide a great boost to growing ventures. Business plans should not only discuss who the partners are, but detail the terms of the partnerships and how they will benefit the company. Finally, the business plan must not place too much emphasis on any one partner in order to convince investors that the business is capable of success even without it.

Documenting the Exit Strategy

All investors greatly desire and are motivated by a clear picture of a company’s exit strategy, or the timing and method through which they can “cash in” on their investment. This picture best comes into focus when the key valuation and liquidity drivers of the company are clearly delineated. An excellent method to accomplish this is through descriptions of comparable firms that have had successful liquidity events, either through acquisition, merger, of initial public offerings (IPOs).

It is helpful to show other companies in your market, or similar companies in other markets, who have successfully exited, and how and why these companies were successful. For instance, were they successful since they acquired a large customer base? Or were they successful since they accomplished fast growth or high profit margins? It is also important to tie their success to their exit price. Was the exit price based on earnings or the number of customers the firm had at the time? The business plan should tie these metrics (e.g., exit price of $X per customer) to the business to determine its future price.

The most common exit strategies in business plans are IPOs or acquisitions. While the method of exit is not always crucial, the investor often wants to see the decision to better understand the management team’s motivation and commitment to building long-term value. If acquisition is the selected exit path, then the business plan should detail potential companies that might want to acquire the firm in the future and why. Likewise, if an IPO is expected in the future, the business plan should document the financial metrics of the company that make it ripe for this type of exit.

In most cases, investors only make money when the business reaches a successful exit event. It’s critical that business plans explain the expected exit, detail why this exit was chosen and validate a realistic exit price.

Accounting Method

When starting a business, you have to determine the method you are going to use for accounting and paying taxes. The two choices are the cash method and the accrual method.

Cash Method

If you are looking for simplicity, the cash method is probably your best accounting choice. Generally, income and deductions can be claimed when payment is actually received or made. This is best shown with an example.

I open a small business and have to order business cards and stationary. I receive the products and pay the invoice on November 18, 2011. Under the cash method, I can deduct the cost on my 2011 tax return.

Some businesses are restricted from using the cash method. C corporations may only use the cash method if they have less than $5 million in gross revenues for a particular year. Professional Service Corporations can use the cash method without limit, while farming corporations can due so if gross revenues are less than $25 million. Tax shelters are prohibited from using the cash method.

Accrual Method

The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem a small difference, it can play disaster with your books and pieces of mind.

Using our previous example, assume I order business cards and stationary on the December 18, 2011. I receive the products on December 30th, but don’t pay the invoice until January 20, 2012. When can the expense be claimed? It depends on when economic performance occurred.

Generally, economic performance occurs when goods or services are provided to you. In the above example, economic performance would arguably occur when the business cards and stationary were delivered with the invoice on December 30th. Thus, I would be able to deduct the expense for the 2011 tax year.

As you can see, the cash method is the easier of the two accounting methods. To determine the best method for your business, speak with a tax professional.