Building on findings from the Valuation Calculator, as a seller you can further test the ability of your business to meet investor return requirements by using our Business Forecast Calculator. The Business Forecast Calculator builds on the expected profits at the end of investment horizon as computed from the Valuation Calculator to show how much capital is actually needed – this includes capital to meet both working capital and CAPEX requirements. Why is this important? Investors always only want to provide the right amount of capital since any excess capital does not earn the desired return. On the flip side, if the estimate of required capital is off by a big margin, the business will most likely carry out subsequent rounds of funding. Investors need full understanding of both current and future business capital requirements to be able to fully comprehend the Opportunity and how to structure the deal.
The Business Forecast Calculator also reaffirms the Valuation Calculator’s findings on valuation. If the seller is overvaluing the business, and if the business cannot absorb additional debt, to attain the expected profits at end of the investment horizon, additional rounds of equity funding will be required. This being the case, to meet initial round equity investors’ target ROI, the seller has to relinquish a larger stake.
Beyond providing a clear picture of capital requirements, by highlighting cash flow movement, the Business Forecast Calculator brings to light the business’ ability to pay dividends. While demand for dividends varies across different investors, dividend payments serve to cut the investment payback period which might entice investors to invest in risky ventures that can deliver a good mix between long-term growth and short-term cash returns.