I was looking at a list of questions that investors should ask when considering investment and I wondered how many small to medium sized law firms would get investment if they decided to start-up today.
I then had a bit of fun and called up an investor that I know and "pitched" him the idea of a "new business" without telling him that it was a "traditional law firm model" that I was using.
Here's the questions and the answers:
1. What does your business do? - We employ trained professionals and sell professional services by the hour. The more hours we sell, the more money we make. We pay the professionals a salary regardless of whether we sell any hours or not, but the idea is to pay the professionals £34 per hour (inc NI) and sell their hours for £100-£150 (or more) per hour plus vat. The difference will be used to pay rent, heat the office, pay support staff and all other costs. The remainder will be divided up at the end of the year between the partners and then we will start all over again.
2. How many countries does and will your business operate in? - Just the one. But it will be more local than national.
3. Who currently owns shares in your business ? - No one owns shares, it's a partnership.
4. Are the partners investing any money in the business? - Yes, some of them will borrow from the bank and invest it in the business and we won't pay them any interest, so we score a bit there.
5. Tell us about your management team. - The managers will be the trained professionals. They don't know anything about management "per se", but hey, how hard can it be?
6. What will you do to fill the gaps in your management team? - There are no gaps. If we start losing money and are struggling we may decide to bring in some "consultants"...but only after a committee meeting, threatening letters from the bank, the loss of some good professionals and when we can't figure it out for ourselves....even then we will delay a little bit longer. Then we will ignore what the consultants say because they are not really trained professionals, are they?
7. Who are your customers now and who will be your customers in the future? - Our customers will be long standing friends of ours and our family and other business people that we have met over the years. Our services are in such demand that the 'phone always rings and people come in the door and our friends recommend us to their friends. I expect in the future it will be the same. We did have a marketing person(s) but we saved money by getting rid of them. That meant more for the partners to divide up at the end of the year.
8. What intellectual property do you have? - A name, (it's all our own names so no one can really use it but us) a logo that we paid a professional designer a lot of money for, so it sits as an Asset on our balance sheet, a brochure website and er..that's about it.
9. What is your business model? - I already told you, to sell hours.
10. What is your financial model? - To pay £34 for hours and sell them for £150.
11. What are your profit and cash flow projections for the next 12 months, 3 years and 5 years? - Well, if we employ 12 professionals we will pay out about £408,000 but we will bring in £1.8m. After costs we should have 30% profit or about £540,000 to divide up, so we will make lots of money in year 1. After that we predict in 3 years we will do the same and in 5 years the same again. Remember we don't invest the profits in the business, we divide them up and pay 40% (or 50%) tax.
12 What do you need the investment for? - A better website. To re-instate my expenses. To clear off the overdratf.
13. What is the valuation of your business? - Well, after year 1 we reckon that 6 times profit is what a professional services business is worth, so £3.2m but if you're really interested, we'll take £3m now and retire as we have no one to hand it on to.
14. How can you justify that valuation? - Because that's what it's always been.
15. What are your long-term hopes for the business? - I'll sell my share of the partnership to another professional and maybe some of the others will do the same and the business will carry on with my name over the door; that would be nice.
16. What are your long-term plans personally? - Same as 15. Then I'll play more golf...in Portugal. I hear that property will be cheap there.
17. How do you plan to exit from the business? - I already told you, same as 15.
18. When do you expect to exit from the business? - As soon as possible, selling hours is hard work...it never used to be...I'm getting to old for this...does anyone want to buy my share of the partnership? I'm willing to negotiate.
I asked my investor friend if he would be investing...can you guess what he said...?