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Independence Marine – Financial Overview

Capital Needs

Prior to March of 1994, Independence Marine will be funded by the founders with an investment of $50,000. These funds will be used for the completion of the product design, production tooling, a limited amount of working capital and primary market development.

In March of 1994, once the field test results have been received and the total viability of the product has been verified, a second round of investment will be required. At this point, an additional $250,000 will be sought in exchange for 30% of the firm. These funds will be applied to working capital needs as production expands. The market demand is highly seasonal and requires a relatively high level of working capital so that the net cash position of the firm can be managed effectively, especially during the first two years (see Figure 9). The founders of the firm will retain 50% of the equity. The remaining 20% of the equity is being held in treasury as future incentive for the operating managers.

Exit Strategy

We intend Independence Marine to be a long term business and will achieve this by expanding beyond our initial product and market. Since there are no firms that currently specialize in serving this industry, there is plenty of room for growth but little potential for a buyout by a larger firm. Our earliest option for exit is a stock repurchase from investors using the considerable amount of cash generated by the firm ($2.2 million by year 5). Eventually, a public offering or leveraged buyout can be made when investors want liquidity or the firm needs greater capital access. Valuation of the firm at that point will be based on a fair outside appraisal.

Returns On Investment

Based on the conservative sales and cost estimates and an initial investment of $250,000 (for 30% of the firm’s equity), Whale Awayädelivers an expected 43% internal rate of return on investment through year five. At this point, the investment value will have increased between 2 and 11 times in the eyes of the investors based on our sensitivity analysis.

Review of Financial Projections

The most important component of the financial projections is the sales forecast. Sales drive our financial results. Our financials are based on our expected market size, including the entry of competition in 1995. We have examined several alternative scenarios (best case, worst case). The table below summarizes the results:

Sensitivity to Sales Assumptions:

Scenario Total Market Size
(units per year)
Presence of
1998 Firm
Net Return on
Expected Case 150,000 per year yes $4,956,169 43%
Best Case 18,000 per year no $7,590,362 62%
Worst Case 75,000 per year yes $1,805,523 17%
Zero-Profit Case 52,500 per year yes $866,234 1%
  • Competition when present takes up 1/3 of market.
  • 1994 capital investment is $250,000 in return for 30% of equity.
  • The 1998 firm valuation combines excess cash reserves in 1998 with terminal value based on a 6-X multiple of cash flow and a discount rate of 16.67%.
  • Return on investment is for the 1994 outside capital investment

Figure 10 shows our projected sales in comparison to break-even sales levels. It is clear that expected sales will be well above break-even levels. This is due to the low capital investment manufacturing strategy and the resulting low fixed costs we have employed.

Cash Management

Independence Marine will be a cash machine. With low fixed costs and healthy margins our firm will generate a positive cash flow (and profits) in 1994, the firm’s first full year of operation. Because this is the first year of outside investment participation, investors will see red ink only in the first few months of 1994. The reason Independence Marine needs investors is not to cover initial losses, but to cover our working capital needs due to our anticipated rapid growth in 1994 -1995. After 1994, Independence Marine will experience a cash and earnings buildup. During the first year, our expected cash position never clips below $35,000. This slack gives Independence Marine some flexibility to compensate for unexpected events. For example, if we have underestimated demand, the $35,000 cushion will help cover our additional working capital needs.

Independence Marine’s expected return on equity ranges from 81 % in 1994 down to 20% in 1998. This is because nonproductive cash builds up, inflating equity and diminishing ROE. Excess cash will either be paid out as dividends and stock repurchases, or will be invested in market expansion projects. Actual returns on equity after dividends or investments will range well above 20% minimum.

Our assumptions in building the balance sheet are included with the financials. However, it is important to note that asset and inventory turnovers are realistic. Inventory ranges from 4-8 turns per year depending on the growth rate.

Sources & Uses of Funds

Our anticipated sources and uses of capital for 1993 and 1994 are as follows:

Uses Sources
Time Period Working
Marketing Product
Investment Operating
June 1993 – Feb. 1994 38,000 46,000 26,000 50,000 60,000
March 1994 – Dec 1994 494,000 42,000 96,000 250,000 324,000 58,000

Independence Marine
Table of Contents Appendices
0. Executive Summary
1. Product Description
2. Market Need
3. Marketing
4. Future Opportunities
5. Operations
6. Management
7. Financial Overview
Market Analysis
Advertising & Promotion
Buyer Behavior
Market Size & Profits
©1993 Independence Marine

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