The Fuel for your EB-5 Engine: Assumptions in your financial analysis

by Soyini Coke

The financial analysis in your EB-5 application is like the engine in your car. If your engine is faulty, you are not going anywhere. Your financial analysis or projections will most likely come from a model—a series of spreadsheets that analyze the likely performance of a company into which the EB-5 dollars will be invested. This model will then become the basis for all the financials in your business plan, a requirement for either a regional center (I-924) or visa (I-526) application. In particular, your financial analysis proves your business will create the number of jobs required by the EB-5 program. 

A well-built model can result in a cogent, credible plan, which leads to an approved application, and eventually becomes a useful tool for strategic and operational decisions. Conversely, a poorly designed financial model may lead to inaccurate projections, potentially resulting in a denial of the investors’ I-829 application after two years because a business did not create the number of jobs promised in its business plan.

This article discusses assumptions in your business plan via your financial model—what assumptions are, why they are important, and how to develop them accurately. Whether you are a project developer or an investor (direct or regional center), being clear about your financial assumptions is critical—their accuracy determines your business’s success. New ventures are inherently risky; however, this approach will allow you to understand and bracket that risk, thereby increasing the likelihood of hitting or exceeding your financial targets.

What are assumptions? Why are they important?

Assumptions are the variables that you put into a model—your price, costs, sales cycle, conversion rates, etc. You must assume them because they are not calculated or implied by any other analysis, and they are variable and imperfect. So, even though assumptions are a choice, they should be driven by empirical evidence and logic rather than by conjecture. Assumptions are the key inputs that fuel the model; if they are wrong, so the entire model will be.

Financial models are used in order to obtain EB-5 approval, to project future profitability, and to market your business to investors. On a broader scale, models are also used to hire em- ployees, purchase inventory and equipment, and take on loans and lease agreements. If your model provides inaccurate results due to poorly chosen assumptions, your company will face enormous pressure, future setbacks, and a general uncertainty that limits your success, costs valuable time and money, or even causes your business to fail. 

While the consequences of erroneous financial projections are painful for any investor who loses money, they are even more so for an investor in the EB-5 visa program, who may face deportation if the quota of 10 jobs is not reached. The risk is very real. In a business with $1 million in annual revenues, a negative 10 percent error in revenue projections would be $100,000 off the top line—that is the equivalent to at least one job in most businesses, which jeopardizes an investor’s visa.

Recommended methodologies for developing assumptions

Historical data - If you have an established business, the most fundamental baseline is what you historically have charged your customers. If this is not an option, you can analyze competitors’ pricing levels in comparable market segments.

Industry experts - One way to double-check your assumptions is to consult industry experts. These could be managers in operating roles, management consultants, or even investment bankers and accountants that focus on your industry. Many of these people create their own financial models and will have valuable feedback on your assumptions. Furthermore, you may get advice for free and expand your network at the same time.

Market research - The final, and often most expensive, route is market research. Sometimes, this can be done through verifiable 3rd party research, such as industry trade publications (i.e. STR Global for hotel data or RS Means for construction data) or databases, like Factiva and FirstResearch. However, these sources may lack the specificity that you require.

In this case, you might consider hiring a market research firm to do a study, especially for larger ventures into new or unpredictable markets. The most important feature of market research is getting feedback directly from potential customers. So, if you have a question about your financials, hire a market research firm to find customers in your target market and ask them that question.

USCIS is increasingly issuing requests for further evidence (RFEs) for 3rd party studies specifically, further evidencing the need for quality, well-researched, and written support for business plan assumptions.

Three common sense guidelines

  1. Check for reasonableness - Do a gut check of the final outputs of your model (analyzing sales, margins, EBITDA, etc.) to see if they are out of place. You may want to alter your assumptions compared to your competition if your business has a more extreme market position, such as a loss leader or a premium brand. For example, if you want to be a premium brand, do not just assume a higher selling price, but also consider lower selling volumes or higher expense levels.
  2. Stay conservative - One important practice of financial modeling is conservatism; when in doubt, you should be conservative with your assumptions in order to avoid bias and prevent extremely negative results. This can include choosing a lower selling price, a lower selling volume, or higher research and development expenses.
  3. Change them! - Our final recommendation is that you update and change your assumptions as you obtain more informa- tion. Do not be afraid to admit that your initial projections were wrong and to adopt a more realistic view when you have new insights.

Two practical examples

Revenue example — pricing

Revenue is, in its most basic form, price multiplied by quan- tity. This means that your pricing is one of the most important assumptions on the revenue side of your model. For example, if your regional center is building a hotel, and your model calls for $175 per night as your base rate, but the customers are only willing to pay $135 per night:

  • When you go to market, you will have to lower the price to $135 per night. This represents a 23 percent price reduction and will negatively impact your margins, and could even mean the difference between profitability and failure.
  • OR You might still book stays at your hotel, but at a lower occupancy than you initially projected. If your model assumes that you maintain 75 percent occupancy, and you end up at 50 percent, your financials could become unsustainable.

You should conduct intensive primary and secondary re- search, perhaps using a third party, to validate the nightly rate and projected occupancy that you use in your model.

Cost example — staffing

For most companies, payroll is the largest single expense. Accurate data on salaries is readily available through many pub- lic sources. However, understanding and projecting an effective staffing model is not a straightforward task. Again, using the example of a regional center building a hotel, if you assume one position will handle both marketing and sales, but you end up needing two separate positions:

  • You will have more payroll expenses than you projected, which directly cuts into your margins. This is problematic, especially when considering expensive benefit packages and continually rising healthcare costs.
  • OR Your team will be under-staffed and you will not be able to drive the projected revenue. If you do not hire the second person, the additional expense will not show up in the SG&A line on the income statement, but this mistaken assumption will negatively affect top-line sales and compromise your model in the long run.

For the most part, good information on staffing models comes from industry insiders. You should consult the relevant trade organization or make sure that you have an industry expert on your team. The bottom line here is: do not make guesses or wing it. Use benchmarks or historical data from an existing, profitable operation.

No model or business plan is perfect, but you can dramatically increase your overall accuracy by doing the detailed work of putting accurate data into your model. This is good for your business, and for your regional center and investor EB-5 applications. When developing assumptions, you should try to incorporate historical data, the opinions of industry experts, and market research. Then, you should supplement these sources by being conservative, checking final outputs for reasonableness, and updating your assumptions when appropriate. Assumptions are the fuel for your financial model and business plan, so if you want to go the distance, don’t skimp—use the highest octane you can.

Soyini Coke

Soyini Coke

Soyini Coke is managing principal at Annona Enterprises, a strategic advisory firm that provides business planning and investment support for companies with up to $100 million in annual revenues. Most recently, Soyini has finished The Perfect Business Plan: A Step-by-Step guide, which captures the methodology she has successfully used with her clients. She began her career at McKinsey after graduating cum laude from Harvard University in 1998 with a Bachelor of Arts in Applied Mathematics and Economics.


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