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The Definitive Business Plan, 3rd Edition by Sir Richard Stutely

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WHAT’S THE DEAL? 247
What’s the deal?
If you are going cap-in-hand to your bankers, you will be telling them that you want a
$10,000 increase in working capital or a $25 million loan for the specific purpose of
acquiring the following assets, with repayment proposed They will mumble some
incantations and arrive at an interest rate that they want to charge you. (But do not
accept it – negotiate.) It is not quite so simple if you are looking for equity funding.
In theory, you value the business (we will do this in a moment), see what proportion
you will raise, and allocate a chunk of shares accordingly. The business is worth $10 mil-
lion today, you are raising $1 million; therefore, you will swap 10% of the equity capital
for the cash. Sometimes it works in much this way, especially for an established business
with a known price for existing shares. Of course, you have to take perceptions of risk and
reward into account.
Frequently, you will work backwards. You place a value of $10 million on the company
(stock market listing or trade sale) at the likely exit point, say, three years hence. You need
$2 million now, your investors’ required overall return is 100%. This means that the inves-
tor wants $4 million back in three years’ time, equivalent to 40% of the equity at that
point. So you issue 40% equity today in return for $2 million.
Sometimes, it is entirely down to supply and demand. You need restructuring capital.
There is only one offer. Take it or leave it. As a point of interest, 40% is a magic figure. I have
shown potential backers varying profits and cash flow projections with the same business
proposal, and they have all tried to negotiate for 40% equity. Maybe it sounds to them as if
it is the largest proportion that they can get away with? It is not always like this. Capital pro-
viders will come in for anything between 1% and 100% depending on the proposition.
What do you want it for?
Seed, venture, start-up, adventure, risk or injection capital are various names
for the cash needed to get a business off the ground.
Working capital is money used to pay for inventory, salaries and other production/
operating costs.
Fixed capital is money locked up in fixed assets such as buildings and equipment.
Growth capital is cash targeted specifically to fund expansion.
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