Incentive Plans
1. It is almost vital to have more than one incentive plan
a. Individual, Group, Company
2. Avoid Weak Plans with easily abused systems
3. In larger businesses:
a. Consider Stock Options
b. Cash Bonuses
i. Fixed amounts
1. Percentage of salary
2. Percentage of sales number per person
4. Avoid Penalizing the good performance
Valuation
would we want to know the value of your company?
To sell it
Going Public
Stock Performance
Divorce from Partners or Spousal Owners
Fund Raising
Estate Planning: Identifying the value for a decedents assets (including
owned businesses
a. Third Party Valuations are the best way to gather this information
Buy out a minority Shareholder through Valuation
Deepay Note: The Rule of 72: Investment philosophy whereby knowing your
interest rate expectations you want to retain, then you can predict how many years
its going to take.
Rule
of 72
Actual # of
Years
Difference (#)
of Years
2%
36.0
35
1.0
3%
24.0
23.45
0.6
5%
14.4
14.21
0.2
7%
10.3
10.24
0.0
9%
8.0
8.04
0.0
12%
6.0
6.12
0.1
25%
2.9
3.11
0.2
50%
1.4
1.71
0.3
72%
1.0
1.28
0.3
100%
0.7
0.3
Rate of
Return
For example, the rule of 72 states that $1 invested at 10% would take 7.2
years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3
years to double ((1.10^7.3 = 2).
Balance Sheets:
Internal Rate of Return (IRR): all the present values of future cash flows converted
into todays numbers minus your initial investment.
When youre a company buyer, always demand an audited statement
Gross Revenue
(Adjustment to Sales returns, sell out for inventories)
-Net Revenue/Sales
(COGS): Cost of Goods Sold:
Cross Revenue
(ADJ)
-Net Revenue/Sales
(COGS)
-Gross Profit
(OP. Expenditures): Operating Expenses
-Operating Profit
(Interests)
(Taxes)
-Net Profit
i.e., Net Income
Then:
Expenses Before Interest, taxes, Depreciation and Amortization
(Depreciation)
Amortization
-EBIT
(Interest)
(Taxes)
-NI (Net Income)
Cash Flow = NI + Depreciation + Amortization
(Deepay Point: Very important): Free Cash flow = Cash Flow Dividends (or
Distributions in Private Companies) Capital Expenses
Cash Flow minus dividends, minus capital Expenditures (Whats the available cash
flow after all your additional expenses and dividends have been considered) This
is especially important if youre buying something. There is no escape from Capital
Expenditures, so you can identify what is your Free Cash flow
Make absolute sure you want to propose an Asset Purchase
Otherwise, you can purchase stock (but you have liability)
Discount Rate: Normally tied in with some indicators in the Market Place
Discount rate is usually 2 or 3x the market rate
Cash
A/R
Inventory (RM)
(WIP)
(FG)
Research about Liquidation % and Liquidation Valuation
VC Data Chart: (e-mailed); Only interested in return on investment and exit
strategy; 1-4 years is the optimum timeframe for exit strategy.
Can I give them enough incentive to invest in my company?
Bankers dont loan to Start ups!
Bankers: Were cash flow lenders! - False! They are Asset Based lenders (based
on guarantees and equity you own)
Most VCs specialize in a specific industry
Due Diligence: An investigation or audit of a potential investment.
Extremely important to appropriately evaluate the ins and outs of a company and
the most accurate numbers associated with the company.
Inventory
Work in Process
Finished Product
Make sure you do not acquire a company with outstanding litigation
Smaller Part of Due Diligence (private mostly): Accountantssomeone related to
the owners. Get an appeal or make an offer contingent upon bringing your own
lawyer or accountant for the purpose of valuation.