Question

Ben Toucan wants to estimate the value of his idea for a new restaurant in Aspen Colorado. The project is in the Development/Start-up Stage. He began in the spring of 2016 with site selection and purchase/lease payments; contracting build out; equipment procurement and staffing at a total cost of $ 250,000. He expects the restaurant will open in 2017, but will not begin to Build positive Cash Flows until 2020. After tax cash flows during the start-up/growth periods were, or are expected to be: 2017 (-$250,000); 2018 (-$500,000) 2019 (-$100,000); 2020 (+$1,500,000); 2021 (+$4,500,000). After 2021 Restaurant Cash Flows are projected to grow at 4% per year.

Ben will personally fund all costs through early 2019, when he will need to raise $ 3,000,000 in external capital which he expects will get the project to positive cash flow and sustainment in 2020. He expects that 2019 investors will require a 30% return to compensate for the risk of they are taking at that time. He needs to estimate the value of his business before beginning negotiations with investors.

1)What is the value of the DISCREET CASH FLOWS through 2021 which are RELEVANT to the 2019 funding transactions.

2)What is the Terminal Value of the restaurant’s projected Cash Flows?

3)Based on your answers in 1 & 2 above, what percentage ownership interest will Ben have to surrender to raise $ 3,000,000 in 2019?

4) If the restaurant sells to an outside buyer to net $25,000,000 in 2021; and the only two owners are Ben and the 2019 investor, how will the Sales proceeds be divided? (HINT: to figure this out, consider the % ownership you calculated in #3 above)

5)If the investor’s money is tied up for 2.5 years, what return will she realize on her investment?

6)What return would be realized if the investor insisted upon (AND GOT) 45% of the company in 2019?

Answer 1