Looking for some help from the money guys

[tiger02]

Hey guys,

I'm trying to set up an investment in Eastern Europe that will be attractive to American investors. I know the dollar blows right now and that makes it harder to invest in Europe but it also seems that growing economies are always good choices, no matter where in an economic cycle the US is sitting.

So here's what I'm looking at. Cash business, valued at right around EUR 1m based on projected cash flow over the first five years discounting this depreciating that etc etc. I would *like* to keep a 50% stake for myself, 10% to an eventual general manager, and 40% to an investor(s). Startup costs are likely to be EUR 150k plus another EUR 150k for the first few months operating expenses. Banks here are out of the question as a source of cash, but I'm exploring the possibility of getting SBA funds from the US or EU funds over here to cover 150k of that.

I'm inclined to offer that 40% ownership stake for the full EUR 300k, with 60% of profits going to the investor(s) until 40% (120k) is paid back; then the 40% of profits until the end of the fifth year. 300k projects to be paid back within 2-3 years. Third party appraisal at the end of the fifth year and either I'll buy out the investor(s) 40% stake then or offer him/them a chance to reinvest in growth of the company.

• Looking at it from the investor's point of view, is this an appealing package?
  
• What would be the best tax setup, loan or ownership? I can set it up so that of that 300k, 30k is in stock and 270k in debt, but still give the same 40% stake.
  
• What information would an investor want to see, and in what format? I have cash flow in an excel doc projected out by day of the week and by month over the first four years, plus a proposal in a word doc that spells out the ideas involved.
  
• How much is it advisable to play with offshoring? I'm getting my head around the Hungarian laws, but it looks like I can invoice a fair amount of income to a tax-havened management company, or just have the Hungo company owned by an offshore holding company. I would then have the ownership stake be in, for instance, a Seychelles company instead of a Hungarian (EU) one.

Many thanks!
Tom

 

[VKK3450]

Why only keep 50% why not 51%?

How solid are your projections? What are they based on? If you are just starting up, then you have no trading history to extrapolate, so then what is the basis of your valuation? Hard part in an NPV valuation.

Why all the convoluted capital structures for a start up? I know it can make sense in some more complex situations, but for something like this with; you, one investor and one manager with equity stake it seems a bit much.

Thats just my pedestrian questions. I know there are many more questions resulting in different scenarios, and I am sure someone else will jump in.

K

 

[dkzzzz]

Eastern European investment; are we talking about whores here?

 

[tiger02]

Originally Posted by VKK3450

Why only keep 50% why not 51%?

How solid are your projections? What are they based on? If you are just starting up, then you have no trading history to extrapolate, so then what is the basis of your valuation? Hard part in an NPV valuation.

Why all the convoluted capital structures for a start up? I know it can make sense in some more complex situations, but for something like this with; you, one investor and one manager with equity stake it seems a bit much.

Thats just my pedestrian questions. I know there are many more questions resulting in different scenarios, and I am sure someone else will jump in.

K

Projections are based on figures from similar businesses in a similar setup in a different part of town, although there are no direct corollaries. Valuation is based off of projections with, IIRC, a 30% discount rate.

Convoluted structures are because Hungarian tax laws are generally convoluted. Also, with the dollar so weak against the Euro and hence the Forint, I want to make this tax-beneficial as well as a sound if risky investment.

This is a case where I don't know what I don't know. K, I'll probably drop you a PM tomorrow AM.

Tom

 

[Thomas]

I've been turning this over in my mind as well and there's something I can't quite put my finger on. How capital-intensive is this business - are you planning on a service busness or goods-based? Are there significant barriers to entry for yourself or potential competitors in your territory?

Also, what's your stake at start-up? Will you have funds at-risk? If I were fronting all the money I'd be hard-pressed to accept all the capital risk for a 40% stake since there is nothing (other than your word/reputation) to keep you from bailing. You'd probably have to have your name on a promissory note, whether from a bank loan or an angel investor.

As far as ownership, you'd probably need a native CPA/lawyer to help you here. A loan is easier to deal with since the interest tends to be a welcome tax shield, but equity doesn't require stringent regular repayments, and each country tends to have their own tax regs.

 

[VKK3450]

30% discount rate ehh?

I started to write a post, but its obviously a complex question, so much which is dependant upon the individual situation (which you rightly are not spilling).

I'm not an expert in these things, but drop me a pm if you like.

K

 

[tiger02]

Originally Posted by Thomas

I've been turning this over in my mind as well and there's something I can't quite put my finger on. How capital-intensive is this business - are you planning on a service busness or goods-based? Are there significant barriers to entry for yourself or potential competitors in your territory?

Also, what's your stake at start-up? Will you have funds at-risk? If I were fronting all the money I'd be hard-pressed to accept all the capital risk for a 40% stake since there is nothing (other than your word/reputation) to keep you from bailing. You'd probably have to have your name on a promissory note, whether from a bank loan or an angel investor.

As far as ownership, you'd probably need a native CPA/lawyer to help you here. A loan is easier to deal with since the interest tends to be a welcome tax shield, but equity doesn't require stringent regular repayments, and each country tends to have their own tax regs.
Goods-based. I'm through the initial barriers to entry, mostly political/bureaucratic. My stake will come out to about 50k when all is said and done, and after a bit more number crunching I think I can get initial opening costs down to where I only need another 90-100k. I feel like my word/reputation/background is worth something but who knows. I'm keeping the Hungarian paper setup simple so as not to deal with the communist-era local requirements.

SBA has great offers for veterans, but operations have to be within the US, unfortunately.

Tom

 

[dopey]

Originally Posted by tiger02

. . . .

I'm inclined to offer that 40% ownership stake for the full EUR 300k, with 60% of profits going to the investor(s) until 40% (120k) is paid back; then the 40% of profits until the end of the fifth year. 300k projects to be paid back within 2-3 years. Third party appraisal at the end of the fifth year and either I'll buy out the investor(s) 40% stake then or offer him/them a chance to reinvest in growth of the company.


. . .
Many thanks!
Tom
This seems like a deal killer to me. Why would someone take all that risk and then have you buy him out of the upside? Maybe, you could have that right if he was paid back on schedule (three years) and made an IRR of 30% through the buyout.