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Bill McCready
The Art of Negotiation: Keeping your Share
When it comes to finding an investor for your venture why should
"fair share" be an issue?
Problems arise when entrepreneurs, experts in their field, find
themselves in unfamiliar territory, and easily intimidated by
the financial "expert" controlling the funding, and the
financial future of the deal.
Some deals fail to get off the ground because the investor wants
an unfair return. Others never see the light of day because the
entrepreneur is unwilling to part with an appropriate share in
exchange for investment capital.
A successful negotiation dictates that both parties walk away
from the table as winners. How do you protect your interests and
ensure that the deal you strike is fair for all concerned?
The best way is to do your homework. Know as much or more about
the true value of your deal as your prospective investor. By
preparing a solid business plan that addresses everything an
investor wants to know, you become an expert in his field. In
the process, you will learn for yourself the fair asking price,
as well as the best and worst case scenarios.
At this stage, you are selling a financial package, not your
product or service. It must be competitive in the marketplace in
the areas of risk, return, liquidity and technical issues. Here
are the basics:
Develop Comprehensive Financial Data
+ Determine the funds required and their use, by back fitting
the cash-flow requirements of your business plan.
+ Decide on an exit strategy for the investor and yourself.
Keep and Hold, Acquisition, or Initial Public Offering. Each
requires different cash management strategies.· Include a
comprehensive pre and post investment valuation analysis for
your business plan and exit strategy.
+ Develop a term sheet or deal structure based on the
prospective investors required rates of return for the stage of
your business.
Business Valuation Study
One of the most frequently used methods to evaluate risk and
reward scenarios is the First Chicago Method, which requires
developing three financial plans and assigning probabilities to
the outcome of the plan.
1. Your plan is successful and goes public or gets acquired.
2. Your business is moderately successful (15% after taxes).
3. The business fails, and is liquidated.
Assign a realistic probability to each scenario, and calculate a
composite value. Then calculate the amount of stock to be
offered based for a required rate of return (e.g. 40%). Back
calculate how much of the business to sell.
Investment Plan
This is the document outlining in further detail the timetable
of required equity and debt financing, and the payback, or
liquidation, of the investor's position under various scenarios.
This is where the "Deal" is structured to make your business
attractive to investors.
By being prepared, not only will you know what is fair, you will
have the confidence to stand up to those who would gladly
demand, and get, more than you should give them in order to be
successful.
An important aspect of all fund raising is to consider the
effects of dilution and rates or return for multiple rounds of
funding. Venture Planning provides work sheets and templates to
analyze the effects of these multiple rounds in their complete
Business
Plan Packages.
http://www.ventureplan.com/business_plans.html
Being prepared to answer these questions in advance will greatly
enhance your standing as financially aware and also help you
keep your fair share of your business.
Venture Planning Associates, Inc., http://www.ventureplan.com
Tel. 858.457.3434 / efax 425-955-7531
capital@ventureplan.com
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