Michael is seeking funding from the Dragon's Den. Michael presents the financial overview of his company and the dens a very ken to capture the revenue data of the company. The discussion below presents the important aspects of Michael’s presentation.
The founder thinks that Threeworks Snacks and Chips is worth $2,000,000. Additionally, the founder of the company is asking for an equity investment of $300,000 for 15% equity.
Michael, who is the founder of Threeworks Snacks and Chips intends to use the investment he gets from the dragons to venture into the USA market. In other words, he wants to use the funds to effectively produce enough, market, and supply into the USA market where he hopes to make a lot of sales.
The revenues of the company were $850,000.
the gross profit margin was 65% on a global basis. However, the actual gross profit margin of the company ranges from 45%-50% after subtracting the expenditure on marketing the product.
The marketing expenditures of the Threeworks Snacks Chip take 20% of the gross profit margin.
Kelvin’s valuation of the company is approximately accurate. The ratio that reflects Kelvin's valuation metric is 1:10. This ratio is significant because it means that the Threeworks Snacks and Chips Company will be consuming more cash than the profits the company is generating. It is consuming 10 times the income generated hence reducing the profit margins of the company.
Jim agrees to make more investment than the $300,000 that the founder of the Threeworks Snacks and Chip is asking for. These investments may be in the form of distribution chains as well as the marketing of the company's products so that these products can effectively venture into the USA market. However, Jim has introduced new terms into the business where he wants larger equity on the investment indicated on the company. Jim’s offer is that he investments $300,000 for 50% equity of the Threeworks Snacks Chip business.
The return on Jim’s equity will be half the total amount of the profits generated by the company. This is because Jim and Michael will have equal ownership of the company upon the offer being accepted. In other words, Jim will own 50% equity and Michael, the founder of the company will have 50%.
The ROE of Jim as per his offer will be:
ROE = Net income/Average Shareholders Equity
Net income is $850,000 while the Shareholders Equity is $300,000 or 50%
Therefore ROE = $850,000/50% of the Net income = 2
The ROE according to the original terms is obtained by:
=$850,000/15% of the net income = 6.67
Jim's ROE is 2 while the original ROE is 6.67 this means Jim's ROE is good because it is the average for both of the shareholders investing in the business.
Notably, Threeworks Snacks and Chips company has several products being channeled in the market. The Apple snack product is the main product that fetches a revenue of $460,000 of the total sales made by the company. Additionally, SugarPova is their new product which is yet to be fully appreciated in the market hence it requires massive advertising. The gross profit margin of 65% is inclusive of marketing costs.
Conclusively, Michael made a wise decision to accept Jim’s offer and it is a win-win situation for both of the investor and the founder.
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