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This chapter is from the book

What Does A Summary Look Like?

What follows is a useful summary format. This format is a composite of many that we have seen. The figures are based on an actual investment, but the numbers and names of the people involved have been changed. The investment made a tremendous amount of money for everyone.

Company

Electronic Press, Inc.

8888 Avenue of the Americas

New York, NY 10005

Telephone: (212) 555-1212

Contact: JB Entrepreneur, President

Type of Business

Online preparation of camera-ready copy and printing of materials requiring quick turnaround.

Company Summary

A new company has been formed to purchase the assets of an ailing printing company. The existing company is a quick-turnaround, standard printing company for company documents. The company’s team will write computer programs to receive standard formatted information over the Internet and convert it to the format for printing. Then it will be sent back to the customer in camera-ready copy, ready for editing. This will continue back and forth until the customer is ready to print.

All existing customers will be serviced with the current business people until the new system is ready.

Management

JB Entrepreneur, president, has been in printing for 12 years. JB has worked in all phases of the business and has been working with computer programs to do this job for the past year. JB has a BA in accounting from a university in New York. JB is 32 years old.

Jim Operator, vice president and COO, has been in the computer field for eight years. He has been a programmer, systems analyst, and management consultant on computer applications. He has been working on a computer program to set type for one year. He has an engineering degree from a large Boston college. He is 31 years old.

As far as product/service and competition, Electronic Press will be continuing to offer conventional typesets and printing. Once the computer can be used to set type, the company will offer the customer five-hour turnaround or better for typesetting and printing. Customers can use the actual camera-ready copy for corrections and make corrections quickly.

Janet Accountant, vice president and CFO, has been with the company for six years and is responsible for the financial planning side of the business. She is a CPA and is age 28.

Funds Requested

$10 million in common stock for a 40 percent ownership.

Collateral

None.

Use of Proceeds

$2 million for new inventory purchases, $2 million to pay off accounts payable, and $6 million to carry the company’s research and development budget to develop the computer program. The purchase price of the business is $16 million (or 6 × earnings before interest, taxes, depreciation, and amortization [EBITDA]): $2 million in cash; $4 million in a five-year, 8 percent note; and $10 million in equity.

Financial History

Item

Actual 2 Years Ago ($)

Actual 1 Year Ago ($)

Actual Last Year ($)

Revenue

5,109,000

9,989,400

12,460,500

Net Loss

(70,000)

(43,100)

(11,600)

Assets

5,279,000

7,700,000

9,870,000

Liabilities

4,238,000

6,420,000

8,601,000

Net Worth

1,041,000

1,280,000

1,269,000

Financial Projections

Item

Projected This Year ($)

Projected Next Year ($)

Projected 2 Years Out ($)

Revenue

18,000,000

26,000,000

42,000,000

Net Income

10,000

1,600,000

5,000,000

Assets

12,000,000

18,000,000

22,000,000

Liabilities

1,000,000

4,000,000

3,000,000

Net Worth

11,000,000

14,000,000

19,000,000

Exit

The company will go public in three years. If the company does not go public in five years, the investors can exchange their ownership for three times their investment and be paid out over three years.

A Second Summary

To give you more food for thought, here is a second summary (again, the information is disguised).

Company

TT5 Corporation

123 Main Street

McLean, Virginia 22101

Telephone: (703) 555-1212

Contact: JB Entrepreneur, Chairman

Type of Business

Manufacturer of switching gear for telephone equipment.

Company Summary

TT5 Corporation was founded three years ago by JB Entrepreneur, an individual with seven years’ experience in the communication and switching-gear industry. The company’s first product was a multipurpose switching unit attached to telephone systems that permits the buyer of the unit to use several low-cost telephone services. The company will reach profitability in one year, and estimates show that it will be very profitable in three years.

Management

JB Entrepreneur, with seven years’ experience in manufacturing PBX and related equipment, founded the company and has served as president. He previously worked for a large communications network conglomerate and several other corporations in the communications field. He is a graduate of a Boston technological university with a degree in electrical engineering and is 32 years old.

Joe Operator, vice president and COO, has been with the company for one year. He has 17 years of experience in the field of telephone equipment for businesses and related equipment. He has written two books on the subject and has been granted six patents for work in telecommunications. Currently, he guides the company in all of its marketing operations. He has an MBA degree from a large university in Maryland.

Jane Accountant, vice president and CFO, has been with the company for two years and has a work history in communications. She worked for two public companies for a total of six years and is a CPA.

Product/Service and Competition

TT5 Corporation manufactures a unique electrical switching box that can be adapted to all forms of PBX and telephone equipment. At present, no companies other than TT5 Corporation are in the business of manufacturing these add-on communication boxes. It is doubtful that anyone will enter the business in the next two years. If competitors do enter, TT5’s patents should give it a monopoly on certain types of installations.

Funds Requested

$15 million convertible subordinated debentures at 13 percent cash interest; 5 percent noncash and convertible into 20 percent ownership of the company.

Collateral

Second secured interest in the assets of the business, subordinated to a local bank debt of $35 million.

Use of Proceeds

The company has currently outstripped its line of working capital at the bank, and its low equity base prevents the bank from increasing the line of credit beyond the current status. Initially, the company will use the $15 million to pay down the bank loan and negotiate a larger line of credit ($50 million) with the bank so that more working capital will be available to the company.

Financial History

Item

Actual 2 Years Ago ($)

Actual 1 Year Ago ($)

Actual Last Year ($)

Revenue

100,000

450,000

2,450,000

Net Loss

(226,000)

(443,100)

(62,600)

Assets

443,000

1,002,000

10,200,000

Liabilities

232,000

1,402,000

9,876,000

Net Worth

211,000

(400,000)

324,000

Financial Projections

Item

Projected This Year ($)

Projected Next Year ($)

Projected 2 Years Out ($)

Revenue

8,000,000

26,000,000

82,000,000

Net Income

1,000,000

3,600,000

15,000,000

Assets

19,000,000

28,000,000

32,000,000

Liabilities

15,000,000

23,000,000

23,000,000

Net Worth

4,000,000

5,000,000

9,000,000

Exit

The company will attempt a public offering on the basis of earnings in three years. If there is no public market and no prospect for a public market in the near future, the company will offer to buy back the stock owned by the fund.

What Makes It Exciting?

There are three reasons why such summaries excite the VC. First, the product is unique. As mentioned, the product is manufactured only by this company, and there appears to be no potential competition on the horizon. The second bit of information that is music to the VC’s ears is the fact that the individuals have had previous experience in this area, as well as long experience in the industry. This background usually makes the VC more comfortable about the operation and about the prospects for the future. The crowning touch is the financial projections.

Not only has the company turned the corner from its actual financial statements, but it is now projecting strong earnings. Obviously, the VC will be led to believe that, in the years ahead, the company will go public or be sold to a large company. When the public offering occurs, the investor (as well as the entrepreneurs) will reap huge capital gains.

Whether or not you wish to use the format suggested here, you must try to summarize and crystallize your thoughts about why you are making this investment. If some nonmonetary items begin to creep into your thinking, it is the first sign that you are making a mistake.

For example, if you are making the investment to help a friend, why not just help him or her find a bank loan instead? Are you making the investment so that you will be famous and be recognized as the person who backed this great investment? You may turn out to be famous for backing a crazy idea that failed. Are you making the investment because the entrepreneur is the same race, religion, or sex? These are very poor barometers for success. Are you making the investment for some social goal? Why not make a cash gift to some charity instead? That will look better than an investment in a failed company. Are you investing so you can be on the board of directors? Being on the board of directors will carry some substantial liabilities beyond your investment—you might find out one day that the IRS is looking to the directors for past-due payroll taxes.

Finally, if you are making the investment because you will get some free merchandise, it would be much cheaper to go out and buy the products you want. Too many people have ended up losing a great deal of money this way, and the product has turned out to be far from free. In your summary, you should keep coming back to the key points; that is, good management, good profit potential, unique product or service, and great exit opportunity. If these things keep popping into your mind while you are writing the summary, you are on the right track.

Once you have finished your summary, you should show it to a few friends and let them read it. An accountant should definitely look at it, and so should your banker. Both are very conservative people and would probably advise you not to invest, but make sure they understand what you see in the business and why you are interested. If your summary churns up their desire to invest in the business, you know you are on the right trail.

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