Venture Debt Business Plans
3 November 2006
I was visiting with a partner at a regional accounting firm that I had not been to see in some time. We began talking about the market and why we (Wellington) provide a product offering that is different. He then asked, “If you offer solutions that are different from the Banks and other providers of capital, what is it that you need to see in a business plan in order to get to ‘yes’?” He is a very motivated solution provider for his clients!
This made me think; I have seen packages that have ranged from a set of financial statements and a number with a question mark on a stained napkin to a 200 page ‘dissertation’ that might include copies of the last 5 years of corporate tax returns, as well as monthly bank statements. Neither instance provided me with the information to make an informed decision.
So what quantum of information is the right amount and what does a venture debt person like me need to see to get ‘excited’?
Here are my general rules, in no particular order, of what I, as a motivated provider of capital, need to see to be able to get to “yes.”
Request for Capital / Sources & Uses:
This is by far the most important part of the whole process! The potential borrower has to be able to explain what they need and why.
We need $xMM of dollars to:
A) buy Company X which is a good price because…;
B) provide growth capital to allow the company to finish growing from $xMM to $yMM;
C) allow the Company to finish the turnaround.
Why? Well because…..
Financial Statements:
We are finance people so obviously financial statements are important. We need to see at least the last 3 year end accountant prepared financial statements (if in business less than that, fine! just include what you can), and the latest internal statements which should be timely, i.e. within the last 3 months (if you can’t provide financial information within that time frame – sorry, you are not in control of your business!). Discussion of the historical results is essential, but only on a high level: In 2004 sales jumped 50% because we won a contract with x, not sales increased 2.1% because.., etc. Discuss material issues.
Budget / Projections:
We help companies that are in a pinch which in our world means “OPPORTUNITY,” so we need to see the next 24 months on a monthly basis including the income statement, balance sheet, and cash flow statements. Annual statements for the following 3 years would be sufficient. Most Important: include the requested capital in the budget so as to demonstrate the importance of the capital and the effect on the company. Make assumptions concerning the cost of capital (see my colleague Mark Usher’s discussion Capital Choices For Your High Growth Company) and include and discuss those assumptions.
Management team:
In the venture debt world we look at companies this way: Management drives the company, which generates the cash, which is used to pay us back our capital. Management is the key to the success to the business, so a full bio of the people that run the business and what role they have in the organization is essential.
Company and Market:
What does the company do to make money? Why is it good at what it does? Where does it stand in the marketplace? How hard is it for someone else to come in and take away its share of the market?
Collateral:
Now the one thing that I didn’t address is collateral, as we do provide a debt instrument. So describe what the Company has in the way of both tangible and intangible assets. Intellectual property is as valuable as a piece of equipment in the world of venture debt
These are the essential components that must be included in a business plan.
Remember, I am the advocate for the opportunity to my investment committee, so give me the ammunition to go to bat!
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