Scenario

For this assignment, you will assume the role of an analyst working for an investor client. Your objective is to make a recommendation to your client, on a potential investment, Air Quality Industries. You will prepare a report of your analysis, including a recommendation in the form of a BUY (make the investment) or SELL (pass on the investment) rating, just as an industry analyst would.

Your report must also contain the key points of your critical analysis, so the client can understand why you recommended as you did.

Format

Case Reports should contain the following four areas of analysis, plus an appendix if necessary (the rubric for this assignment is 10 pts. for each section):

1. Summary & Presentation (13 pages)

2. S.W.O.T. (1 page)

3. Risk4 Components (1 page)

4. Quantitative (1 page)

Case Analysis Report Details

Ensure that your name is on the front page as well as your recommendation. Important: you MUST provide an investment recommendation (BUY or SELL) to receive credit for the report.

I. Summary and Presentation. (13 pages)

This section should summarize your analysis, reasoning, and recommendation. If this were the only section your client read, he or she should be able to understand why you recommended as you did. For this reason, although this section comes first, I recommend that you prepare it after you have completed the other sections.

This section should also include a review of the overall quality and presentation of the case materials. There is no one way to prepare fundraising documents. However, there are some common themes used by companies that actually get funded.

Some questions you should consider are: Was the plan easy to read? How was the spelling and grammar? Did it convey the opportunity? Was the structure of the investment compelling? Were the assumptions and the financial statements (if any) well laid out and clear to discern?

II. S.W.O.T. Analysis. (1 page)

This section explores the qualitative issues of the case. It should contain two parts: a S.W.O.T. (Strengths, Weaknesses, Opportunities, Threats) analysis in chart/bullet format, and supportive reasoning of the S.W.O.T. in paragraph format.

Try to contain the length of each bullet to one or two sentences. Your supportive narrative should be organized into the four areas and include your rationale for why you saw it as a strength, weakness, etc. You should be able to highlight the most important issues from the investors perspective without lengthy discussion.

III. Risk Analysis (Four Components). (1 page)

This section should include your summary of the four components of risk, which are:

1. Product
2. Market
3. Team & Execution
4. Financial

You should rate the company for each of these risks (HighMedLow). As you consider the questions below, you won't have answers to everything. Consider which areas contribute most to you recommendation and list those.

1. Product:

Ask yourself, are the products fully developed and ready for sale? Where are the products in the product life cycle? What is the expected longevity of these products? What is the plan when these products decline? Are there additional products being developed? What are the characteristics of the value chain the company depends on for the production of these products? What is the production capability of the company or the sourcing company?

Are there economies of scale that need to be reached to maximize the growth potential? Are there, or will there be problems with inventory? Does the company have a research and development department? If so, who runs it? Who are the key personnel responsible for the development of the companys products? What products does the company depend on for its business?

How do the products compare with the competition? Is the product or service industry disrupting? Does the company have first-mover or exclusive advantages over the competition? What is the major competitive advantage in terms of utility (product, place, price, promotion, personnel)? What is the unique value proposition of the product or service? Is there a technology risk (imitation, obsolescence, failure) to the product?

Does the company have product liability insurance? Has the product undergone third-party testing? Are the results of such testing available? What are the capital expenditures to produce the product and support it? Does the company financing plan support the production and development of the product? Does it support the development of replacement products if required? Are there patents or other intellectual property rights to the product or service and who owns these rights?

Do other stakeholders of the company have interest in the product, inventory, and intellectual property rights? Are the products or services too diversified or too concentrated from a risk perspective?

2. Market:

Ask yourself, can the product be sold? Furthermore, has the company proven that customers are willing to buy it? Have they sold one?

Does the company have a fully developed Customer Acquisition Model (CAM)? What is the pricing structure? How does it compare with the competition? Is the pricing in line with the segment of the market that the company is targeting? What is the advertising model? What is the companys budget for sales and marketing? Is the market scalable? Is there a brand name or names associated with the product or service?

Can the company describe the distribution channel or channels? Have any feasibility studies been performed? Does the product or service serve a niche market? If so, how big is the niche market? Is it expanding or retracting? Does the company have any third-party endorsements? Are the sales and revenue projections reasonable? What are the barriers to entry into the markets? Does the company have a competitive advantage over the competition? Where is break-even for the company in dollars and units?

3. Team & Execution:

Can management execute to make the company successful? There is a saying in the venture capital business, Bet on the jockey, not the horse. The ability to ascertain the inter-personal skills of management is difficult. In this section, you want to discover background like work experience, education and professional achievements. You do this by looking at the bios of key management. How old are they? Is there a nice blend of age to show the excitement of youth and the wisdom of experience? Is management working in the same field as their educational and professional background?

You want to consider the organizational chart of the company. Is the organization too horizontal or too vertical? Are there missing personnel in the organization?

Are there cash flow issues and do you think management has the experience to work and succeed under this type of pressure? What are the financing issues the company is having; is management well equipped to deal with them and utilize assets in the company to solve these problems? What other immediate threats or weakness will pose management issues for the company? Does management have key relationships that will help the company?

Does the CEO have vision and engender confidence? Does management have the skills to run a large organization or do you think that more seasoned management needs to eventually be brought in?

Does management look like they have the ability to set budgets, implement and analyze? Has the company laid out a strategic growth plan that looks attainable? What are managements long term goals? Does the company have a board of directors or advisory board that will aid in the achievement of company potential? Does management own of enough of the company to keep them incentivized to stay through the tough times? Does management have real money invested in the company that will cause them fight as hard for you as the investor as they will for themselves?

4. Financial:

Can the investor get his/her money back? How? Can he/she get his/her required rate of return? Concerns over getting their money back are not isolated only to venture capitalists but to any person who invests. You must look at the overall business model, structure, management, board of directors and consultants with the company to ascertain if they can provide confidence and security that they can return money to investors with the required rate of return.

IV. Quantitative Analysis.

Here you will summarize your analysis of the quantitative aspects of the deal. You can draw on what you have learned in other courses, notes, textbooks, online resources etc.

I recommend approaching the quantitative analysis in this order (there is no one way to analyze a company and you will not be docked if you choose to take another equivalent approach):

1. Valuation and Hurdle Rate. See the valuation formula and hurdle rate section in the videos. I do these first, because if these don't make sense, then further analysis isn't going to change the recommendation. Look at the financial information as it pertains to the Valuation Formula, probability of risk and return and required rates of return. If you have a hurdle rate and you can tell that the company won't meet it, then it's a no. You are free to suggest changes in terms if you think the deal could be saved.

2. Cap Table. By attempting to understand the capital structure of the company, who has invested how much and when, and what the distribution of equity is between shareholders, you can get a good understanding of the motivation of the parties.

3. Simple Analysis. Next, I start by questioning simple things. I'm looking to see if the story of the executive summary matches the projections (and have they cared enough to think this through). For example, How many units must be sold to produce the projected revenue? Are they raising enough money to produce those units? Does a reasonable expectation exist that there is market demand for that many units. How many are they selling? Compare the cap table and projected earnings and chart the EPSis it reasonable?

4. Complex Analysis. By now we know whether or not the company has passed a smell test and there may legitimately be an opportunity here. So we look deeper at the accounting. What's the growth rate been, and do the projections match that? What does the balance sheet, income and cash flow statements look like? Here's where you pull out your financial accounting and look at the company's margins, its acid test/quick ratio, its debt to equity and so forth.

The narrative for this section should provide your basic assessment of the qualitative elements of the company. By the numbers, would you recommend investing?

Its common for young companies to struggle to provide complete financials and strong financial performance. The risk of the deal is often apparent in this section. So, you will need to work with what you have, however scant, and derive whatever you can in order to influence your final recommendation.

If you need to include additional information that supports but does not summarize your quantitative conclusions, please attach it as an appendix, and keep this section to one page for summarizing the quantitative elements and how they impact your recommendation decision