Possible new business: help with $$$ estimations

[dullard]

I'm trying to put together a model for a possible new business. It may work, it may bomb. But I really need some good estimations before I attempt to get this thing going. So any help would be appreciated.

1) Suppose I had several employees and the total salary I expect to pay is $400,000 in a year. What would be a good estimate for the actual total cost (adding in bonuses and other benefits, payroll tax, etc)?

2) Suppose I buy a license from a company to use their patent. And suppose they say they want 10% royalties. Is that typically 10% of the revenue of selling the machine? Or is that typically 10% of the profit made on the machine? I realize this would be clarified in the actual deal, but what is standard?

3) What do you think investors would require for my best 10 year estimations in order to invest. Suppose the business model shows we should expect to pay back 5 times the initial investment after 10 years. Would that get people invested (since they have the risk of losing it all). If not what do you think it would take? Obviously few people would risk money if they could only expect a small return with a lot of risk. For more specific numbers, would people invest $35,000 per share if a pessimistic business model estimates $200,000 in dividends paid per share after 10 years?

4) What is the maximum number of investors you can have before you have to file a bunch of legal paperwork? I heard the number was in the upper 20s. Anyone know the exact amount?

 

[Yossarian]

Originally posted by: dullard
2) Suppose I buy a license from a company to use their patent. And suppose they say they want 10% royalties. Is that typically 10% of the revenue of selling the machine? Or is that typically 10% of the profit made on the machine? I realize this would be clarified in the actual deal, but what is standard?

I work in the toy industry. When we license, royalties are paid on sales, not profit.

 

[Vette73]

Originally posted by: dullard
I'm trying to put together a model for a possible new business. It may work, it may bomb. But I really need some good estimations before I attempt to get this thing going. So any help would be appreciated.

1) Suppose I had several employees and the total salary I expect to pay is $400,000 in a year. What would be a good estimate for the actual total cost (adding in bonuses and other benefits, payroll tax, etc)?

2) Suppose I buy a license from a company to use their patent. And suppose they say they want 10% royalties. Is that typically 10% of the revenue of selling the machine? Or is that typically 10% of the profit made on the machine? I realize this would be clarified in the actual deal, but what is standard?

3) What do you think investors would require for my best 10 year estimations in order to invest. Suppose the business model shows we should expect to pay back 5 times the initial investment after 10 years. Would that get people invested (since they have the risk of losing it all). If not what do you think it would take? Obviously few people would risk money if they could only expect a small return with a lot of risk. For more specific numbers, would people invest $35,000 per share if a pessimistic business model estimates $200,000 in dividends paid per share after 10 years?

4) What is the maximum number of investors you can have before you have to file a bunch of legal paperwork? I heard the number was in the upper 20s. Anyone know the exact amount?

1. Add anywhere from 25% to 60% for SS, benifits, labor insurance, etc... It depends on what you offer, taxs, and also how many people. Being a small firm you can get tax credits and also there are a lot of laws that you don;t have to worry about if you have less than X people. I don't have my notes with me.

2. It would be from sales, NOT profit, unless you get a special deal.

3. Pay off period is good to have in paper work, BUT if you don't have a vision and strong idea/product then no one will touch you. You are a very small firm, so look for "Angel Investors". They are usually retired people looking to invest there money as one.

4. Not sure what you think a investor is. A partner and investor are 2 different things, so which are you talking about? For your company file it as a S Corporation OR LLC with the state. They are the same thing but some states call them S Corps and some call them LLC. This will give you legal protection of a Corporation but tax advantage of a self employed person.


I guess that BS in Business Admin did teach me something
😛

 

[kranky]

1. Benefits and payroll taxes could add anywhere between 10-30% or more. Depends on how generous you are with the benefits.
2. Royalties are based on sales, not profits. 10% seems high anyway. You'd want some sliding scale where it drops to 7%, then 5%, etc. as sales rise. Maybe you could negotiate for no royalties for the first X sales in return for a small piece of the business.
3. Depends. If it's in an industry where it's hard to succeed, people would like to see profits sooner than 10 years out. If a realistic plan shows earning the money back within three years, you'll find investors. If it will take seven years to earn it back, then there better be a big pot of gold out there.

 

[dullard]

I work in the toy industry. When we license, royalties are paid on sales, not profit.

That was what I thought, but I just wanted to be sure when I fill out the estimations for myself.

1. Add anywhere from 25% to 60% for SS, benifits, labor insurance, etc... It depends on what you offer, taxs, and also how many people. Being a small firm you can get tax credits and also there are a lot of laws that you don;t have to worry about if you have less than X people. I don't have my notes with me.

I was using 30% for my estimations, maybe I'll bump it up a bit to be more in the middle of your range.

3. Pay off period is good to have in paper work, BUT if you don't have a vision and strong idea/product then no one will touch you. You are a very small firm, so look for "Angel Investors". They are usually retired people looking to invest there money as one.

I think I've found most of the potential investors, but the key is waht price I request for the shares. Obviously the investors want a low price, and the owners want a high price. Do you think $35,000 for a share that will likely return $200,000 in 10 years is too much to ask? Of course if the business is a success it will return $1,000,000+ on that share but I won't try to convince anyone that we could expect that much business.

4. Not sure what you think a investor is. A partner and investor are 2 different things, so which are you talking about? For your company file it as a S Corporation OR LLC with the state. They are the same thing but some states call them S Corps and some call them LLC. This will give you legal protection of a Corporation but tax advantage of a self employed person.

It will have to be a C corp so the investors can use their IRA money or so I've heard. A business major will be one of the first people hired to help out with this stuff.

 

[dullard]

Originally posted by: kranky3. Depends. If it's in an industry where it's hard to succeed, people would like to see profits sooner than 10 years out. If a realistic plan shows earning the money back within three years, you'll find investors. If it will take seven years to earn it back, then there better be a big pot of gold out there.

My current best estimates:
1) No dividends for 2.5 years.
2) Complete return on the investment in 3.5 years.
3) But the big dividends would occur for the 4 years following.
4) Dividends drop from there, leveling off in about 10 years.

 

[kranky]

Complete return on investment in 3.5 years should be attractive to investors if your business plan is solid.

The price per share isn't important. It's how much of the company ownership is represented by one share. Big difference.

Let's say you need $1,000,000. You can have 50 shares at $20,000 (each share represents a 2% ownership of the company), or 20 shares at $50,000 each (each share represents a 5% ownership of the company), or any other combination. So the price isn't meaningful without knowing how many total shares there are.

 

[sciencetoy]

Good luck on your biz.

Employee expenses: rule of thumb is double their salary for total expense.

License: on sales

Investors: I see that you haven't mentioned the most important thing investors will usually want to see, which is management talent. Another rule of thumb is that the less you bring to the table (money, talent, connections, whatever) the more you have to give to the investors.

Legal: Your lawyer is the number one most important factor in how much money you get to keep, in the long run. Start interviewing lawyers now.