A Quick Primer on how to tell a good deal from a Dog!

It’s Not Rocket Science

Presentation by Mark Barbashat

Buckeye Power Economic Development Workshop

November 13, 2012

Provide economic developers with tools to quickly evaluate development projects for their viability– From the perspective of the community– From the perspective of the economic viability of:• An operating business project• A real estate development project

Goal:

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How will the project benefit the business?

How will the project benefit the community?

Is the project timetable realistic?

Are project costs documented and

realistic?

Financial Feasibility

Evaluating the viability of a Business Project

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How will the project benefit the community? Job creation Job retention Research or skills capabilities Support industry cluster or technology Key community initiative (location) Main Street Revitalization

How will the project benefit the community?

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Market Identified the market for

product or service Wide market or niche

market Competition

Management Business Mission Required skills within top

management P & L Manager in

Manufacturing

Management and Financial Health of a Business

Financial Profits are nice….Cash pays

the bills Customers and suppliers

control a business’ success Owners should have a stake

in the business & project Growing sales can

sometimes be a problem Controlling expenses is

difficult

Mark Barbash WEDA Presentation 6

Question Ratio Formula Year 1 Year 2Is the business growing?

Sales Growth (Sales Year 2 – Sales Year 1) ÷ Sales Yr. 1

Is the business profitable?

EBT Positive? EBT + Sales

Does the business have cash to pay the bills?

Quick Ratio (Cash + Receivables) ÷ Current Liabilities

How well has the business managed debt?

Debt to Equity Ratio

Equity ÷ Debt = Debt to Equity Ratio

How well is the business collecting from its customers?

Days Receivable Receivables ÷ Sales X 360

How long is it taking for the business to pay its suppliers?

Days Payable Payables ÷ Cost of Goods Sold (COGS) X 360

May 17, 2012

Key Financial Ratios

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How will the project benefit the developer?

How will the project benefit the community?

Is the developer experienced in the market and sector?

How stable is the developer and how firm

is the financing?

Financial Feasibility

Evaluating the viability of a real estate project

1. Most developers are dreamers and story tellers2. Most developers never saw a project that didn’t

fit the market3. Look for signed leases4. Watch out for developers’ fees5. Who’s calling the shots?6. Experience in the type of development

proposed7. Real estate markets can turn bad very quickly8. Lenders lend on value, not project cost

Rules for Working with Developers

1. Are they willing to provide business and personal financial statements?

2. Are they willing to provide references?3. How do they respond to challenging “devil’s

advocate” questions? 4. Is their answer always “Someone Else was in

Charge?” 5. Do they expect “free money?” 6. Do they have a realistic assessment of the market,

competition and job creation potential?7. Are they willing to spend money up front?

How to Determine if it’s a Real DealOn the First Visit

1. Not all projects can fit with public sector programs2. Let the program people represent their program3. Don’t overpromise what the program can deliver4. Don’t pile on government programs5. Explain the strings up front6. Find a willing lender7. Keep written records of your activities8. Be prepared to help with the paperwork9. If it sounds too good to be true, it probably is10. Take informed risk!

Rules for Working with Public Programs

1. Does the developer have site control? If on option, when does option expire and what are terms renewal terms?

2. Has an environmental assessment been completed and have all issues been identified?

3. How far in advance does equipment have to be ordered? Does payment have to be made on advance orders?

4. What is the timetable for site prep/ Construction? 5. Does the general contractor have experience with

this type of project in this type of community?

Questions to Ask aboutProject Timetable

• Money: – Inadequate working capital – Site problems, Project costs escalate– The financial strength of the business deteriorates

• Market: – Defined too broadly– Unfamiliar or inappropriate business line

• Management:– Inadequate business skills among principals– Expanding too fast

Why do Projects Fail?

1. Has a real estate appraisal been completed?2. Has an engineering assessment of existing and

needed infrastructure been completed?3. Has an environmental assessment or Phase I

been completed which shows any remediation that must be completed?

4. Has an engineering assessment on buildings & equipment been completed to assure that there are no structural issues?

5. Have detailed and documented project cost estimate been done by a third party?

Key Questions to ask aboutProject Documentation

Thank you.