Module 12: Ask & Deal
🎯 Our goal in this module is to create your Ask & Deal section of your Business Plan.
Okay, so you have completed the Financial Projections for launching your business.
You have figured out how much money you will need to “open your doors for business” and operate until your business is profitable.
If you already have all the money that you’ll need, then you can skip this section in your Business Plan.
However, you may want to take a quick read through, just in case you choose to seek outside funding in the future as you grow and expand your business.
What is the Ask & Deal?
Mostly, it’s just a catchy title. 😉
Basically, the Ask is about how much money you need to fund your business until it’s profitable. The Deal is what you agree to give to those who provide you with that money.
If you borrow money, you will usually give the amount that you borrowed back to the lender(s), plus interest.
If you accept investment money, you will usually give up a percentage of equity ownership in your business to the investor(s).
There are hundreds, if not thousands, of online articles, books, YouTube videos, and websites out there that can tell you all about Venture Capital, Angel investors, crowd funding, startup accelerators, and more.
That’s not where we’re going right now.
We just want to talk about the basics of looking for funding and negotiating a somewhat reasonable deal—to help you think things through a little better and get prepared for the funding process.
Take a moment and reflect on where you are right now. You have probably done more work preparing yourself for launching and building a successful business than 99% of startup entrepreneurs out there.
- You have researched your idea, your industry, and your competitors.
- You have talked with your potential customers, industry insiders, and even some of your competitors getting feedback on your product/service and recommendations for how to make it better.
- You have begun prototyping your product/service—testing it with real people in the marketplace in order to validate that it is a high potential opportunity.
- You have made modifications as needed, and you have developed a business model and a detailed plan for exactly how you will do everything needed to launch, operate, and grow a successful business.
- You have captured all this and condensed it into a compelling narrative (your Business Plan) that should inspire you, as well as others.
If you will need more money than you have in order to launch and grow your business to profitability, there are generally two choices:
- Debt (borrowing money and paying it back with interest)
- Equity (sharing ownership in your business)
About Borrowing Money
Banks are quite conservative with their money—they are pretty much “risk avoiders”.
So, don’t be surprised if you find them avoiding you when you ask if they would be interested in financing your “very risky business startup”.
Important: If banks lend you money for a startup, it will be to you, not to your startup business, and it will be based on your ability to repay the loan.
Later on, when your business has proven to be successful, profitable, and sustainable, the banks will be ready to lend to your business, based on the ability of your business to repay the loan.
Important: The other thing about borrowing from banks for a startup is that they will require your personal guarantee to repay your loan, which will include collateral.
Collateral can be your home or real estate, but it can also be anything that you own that the bank feels confident could help cover the amount of the loan in the event that you are unable to make your payments.
To learn more about bank loan options and details, give your bank or credit union a call.
Ask for a loan officer. Tell the loan officer that you are preparing to launch a business and would like to talk about getting a business loan.
Start with your bank or credit union to learn all that you can about:
- Amount of money they might be willing to lend you
- Interest rate that they can offer you
- Length of time for the loan (longer time will give you some cushion, in case of unforeseen startup problems)
- Size of monthly payments
- Collateral requirements
Then, shop around at other banks and lending institutions to compare offers.
There are usually some banks that are more aggressively trying to attract new clients, and they may offer better terms to win you over.
Also, some banks may work closely with government subsidized lending programs that you could qualify for. Compare all the offers.
Okay, so there are other borrowing options that you may have, including friends and family, crowdfunding, peer-to-peer, borrowing against your retirement account, using your credit card(s).
The point here is that using debt finance for a startup business means that if your business fails, you will still be personally responsible for repaying all the money that you have borrowed.
Something to think about when you evaluate your options.
About Equity Investment
(Sharing ownership of your business)
Somebody may be willing to provide you with the money you need in exchange for owning part of your business. The money they provide is called “equity”.
Of course, the big question is: Do you want to share ownership?
If yes, then: How much ownership for how much equity? What’s reasonable? What’s fair?
Note: Raising equity funding is a combination of art and science—probably more art than science. As such, your negotiations should involve a healthy amount of subjectivity to go along with objective analysis.
There is no one special, magic formula to be applied to any part of the process, and there are no “laws” governing these negotiations. Be reasonable and do your best to reach an agreement that will be in the best interest of your business.
In the end, it will be 100% your decision whether or not to bring any investors onboard.
Because you have completed your Financial Projections, you already know how much money you are looking for—at least the minimum amount that you will need.
Suggestion: Even though you have created an excellent, detailed plan, I suggest that you add 15%-50% to that minimum amount for potential unexpected, unplanned costs, complications, and delays.
If your business is pretty straightforward, without too many working parts that might not work as planned in the beginning, an extra 15-20% would probably be plenty of cushion.
Maybe you will be creating an online store where you purchase ready-made products and then sell them to your customers or social media followers.
Or maybe you will be starting a home delivery service where you simply do grocery shopping for your customers using their credit cards.
However, if you are planning to build a specialty food processing business with lots of equipment and employees, and you will depend on a consistent supply of high-quality raw ingredients from organic farmers, and you will need packaging containers delivered on time with labels correctly printed, and many more critical things that could potentially not work out exactly as planned in the beginning, something closer to an extra 50% would probably be in order.
Now, you should also estimate what you believe your business will be worth five years in the future, if everything goes as planned.
There are many ways to approach this valuation, and all of them are “just guesses”, so don’t get locked into believing too strongly in whatever value you calculate for your business.
Being aware of the different methods and a range of possible valuations of your business, will put you in a very strong position for negotiating with investors.
Five years is not a magic number, but it generally works well, because it will give you and your team enough time to go through the first year or two of the startup learning curve, recover from your mistakes and from any setbacks, grow your customer base, establish operating systems, gain some momentum, and then have a couple years for significant growth.
There are many methods of valuing a startup business, ranging from ultra conservative (where bankers are usually found), to extremely liberal (where you may find a very enthusiastic entrepreneur who hasn’t done the work that you have done).
You should play around with several of these calculations before you actually talk with anyone about investing in your business.
If the industry that you will be operating in has a preference for a certain method of valuation, be sure to include that method among your choices.
Do some simple research online to see what other startups like yours have been using. For example, you can Google
“How to value my startup tech company”.
Try not to get carried away with this, just run through a few different valuation methods for your company to get an idea of the range of valuations that can be calculated. Of course, you will want to build your case around the highest valuation. 😉
To help jump start the valuation process, we have provided you with a couple options in our Financial Projections template:
Net Worth: This is a conservative “banker” valuation. Just look at the Net Worth of your company on the Balance Sheet for the end of Year 5.
Net Present Value (our version, at least): You have already calculated your Net Cash Flow for each year over the next five years. We have included a formula in our Google Sheets template that will convert those numbers into a discounted value (valuation) for you—the Net Present Value of your business.
Don’t worry if this sounds confusing—we’ll walk you through this in our upcoming video tutorials.
Again, don’t get carried away with these valuation exercises.
By the time you have calculated several valuations for your startup business, you should be settling in on an approximate value that you feel confident in using for your equity funding negotiations.
Next question is: How much ownership of your company are you willing to give up in exchange for the startup capital that you need?
You will find that expectations for equity and for return on investment will vary significantly, depending on who you are dealing with.
The vast majority of startup businesses are self-funded by the founder(s), and most of the rest are funded by friends, family, neighbors, people you work with, bosses, small business owners, and others in your network.
And then there are some—a very, very small percentage of startups—who will find equity funding from Angel investors or Venture Capitalists.
There is an even smaller percentage of startups getting funded on crowdfunding platforms.
And the percentage of startups funded with free money—grants, contests, government small business incentive programs, and everything else—is so small that it is hard to even show on a graph.
Family, friends, neighbors, work colleagues, bosses, small business owners, etc. will generally be open to a reasonable arrangement that seems fair.
You basically have a clean whiteboard to work with them.
If you offer equity, you will need to consider the size of their investment but try to negotiate something under 10% ownership with them.
Negotiate a win/win situation and go with it.
Angel investors are usually wealthy individuals or groups of wealthy individuals who invest in startups and early growth businesses. Generally, they invest within the range of $5,000 - $500,000, and they may be able to help you with more than just money.
They may have experience in your industry, or connections in your industry who can advise you and act as sounding boards for you as you analyze options and make decisions in your business.
They may even use their networks within the industry to help you grow your business.
They will be looking for exciting, but not insane growth potential, and they will usually place a high priority on you, your ability, and your commitment to building your business long term.
You will find Angel investors all along a continuum from very informal and easy to talk to and negotiate with at one end (much like friends and family) to quite formal and less personal with clear, specific, and fairly rigid guidelines and performance expectations and very little room for negotiation on the other end.
Regardless of where an Angel investor is on this scale, you should receive a value much greater than just the money, if you find a good match for your needs.
Venture Capital firms are professional equity investors. They dominate the high-stakes/high-risk equity investment territory. They will probably know more about your industry, your competitors, your customers, and your potential than you do.
They will have their own ideas about how to value your company and how much equity you will need to give up.
Their valuation will probably be lower than you expect, and the amount of equity that they require will probably be more than you expect—they have their own formulas.
They take high risks, and they expect high rewards—10x investment return is not an uncommon expectation.
They will require strong leadership and management capabilities for your business. If you are not up to the task, then you will probably not last long at the helm of your business.
Your negotiation options are probably going to be pretty close to “take it or leave it”, but if you reach this stage with a Venture Capital firm, it should be serious confirmation that you have a high potential opportunity.
You can use Google to find Angel and Venture Capital investors just about anywhere in the world. Try to find those who are in your geographic area (somewhere reasonably close by) and preferably who have a history of funding startups in the industry that you are entering.
Start looking close to wherever you are located, and then expand your search if needed.
Most investment groups or firms will have websites with enough information about who they are and how they operate, plus client lists.
Read about who they are, their funding history, their funding criteria and requirements, their equity expectations, their success stories, and the smallest and largest investments that they have made.
Basically, learn all you can about these options.
When you find a potential investor match for you, it will be a good idea to talk to some of their clients to learn what you can about their experiences with these investors before you contact the Angel investor/Venture Capital firm.
Each firm should have instructions on their website regarding how to contact them.
Important: Know who you’re dealing with. Regardless of the type of investor, check out their references and their reputation. If they meet your standards and they make you an offer that looks reasonable, it should be worth considering.
Very Important: Whatever you decide, you need to involve an attorney on your behalf to advise you, protect your interests, and draft or review and approve the agreement(s).
Good News: You are in an excellent position to explore all options because of the work that you have done and the business plan that you have created.
If you haven’t been doing this already, right now is a good time to start telling friends, family, work colleagues, and most everybody you know or meet about your high potential business opportunity—start generating interest!
Your story at this point is that you have done all the work—validated your value proposition, developed a solid plan with financial projections, and you are getting ready to launch.
You can also spend some time researching crowdfunding platforms for business startups—just Google “crowdfunding for startup business”.
Compare terms and conditions and look at past performance of various platforms. Read stories, ratings and comments.
Browse through the successes and see exactly what their campaigns looked like.
Be aware that creating a successful crowdfunding campaign takes a serious amount of time and energy—very much a full blown, full time marketing effort.
If you are considering a crowd funding campaign, talk with some of the people that have already had successful fundraising campaigns to get an idea of what is involved and what you can expect.
Again, it’s all up to you.
You can choose any or all equity funding sources available. You can also combine equity funding and debt financing. Evaluate your options.
Run different scenarios that you are considering through your financial projections—this is easy and quick to do using our Google Sheets template.
Just plug in the amount(s) of money that you are thinking about borrowing or taking as equity investment and see how different scenarios affect your financials. This is quick and easy to do and should be fun.
Most importantly, looking at different funding scenarios will help you to make the best decision for your situation.
Decide how you would prefer to fund your startup and then create a plan for raising the money you need.
If you have determined that there are 2-3 funding scenarios that would work for you, then start with your best option.
With your Business Plan and valuation calculations in hand, you are ready to start finding people with money and setting up meetings (probably virtual, maybe through Zoom).
In Phase 3, we’ll help you to create a compelling presentation to guide your interactions with all types of potential investors!
Create your Ask & Deal.
Now, go to the Ask & Deal section in our Business Plan Core Template and write out your narrative.
We are currently creating additional instructions and tutorial videos demonstrating how to create your Ask & Deal section. Stay on the lookout.
Scroll left-to-right across the table below to view all columns. Click on any item in the leftmost column to open that specific resource page.
Business Plan Core Template
A no-frills Business Plan template in Google Sheets. (Created by our Team)
FinancialsCash FlowProfit & LossBalance SheetBreak-EvenBizActually
A Google Sheet to organize and calculate your financial projections. (Created by our Team)
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