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 2012 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 2013, but will not begin to Build Cash through positive Cash Flows until 2016. After tax cash flows during the start-up/growth periods are expected to be: 2013 (-$.25 MIL); 2014 (-$.5 MIL); 2015 (-$.1 MIL); 2016 ($ 1.5 mil) 2017 ($ 4.5 MIL). After 2017 Restaurant Cash Flows are projected to grow at 4% per year.
Ben will personally fund all costs through early 2014, when he will need to raise $ 1.2 MIL in external capital which he expects will get the project to positive cash flow and sustainment in 2015. He expects that 2014 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 which Ben projects through 2017?
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 $1.2 MIL in 2014?
4. If the restaurant sells to an outside buyer to net $13,500,000 in 2016; and the only two owners are Ben and the 2014 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 SHE GOT) 35% of the company in 2014?