Business Plan Risk and Discount Rate Evaluation

Introduction and Overview

Of the three business plans evaluated in this analysis, two are startups, and for that reason alone carry greater risk than the established enterprise. Among the two startups, the greatest risk stems from the novelty of the venture in relation to its owners and operators, as well as the degree of control the company can exert over market share. A discount rate appropriate to each plan's risk level is the central evaluative concern throughout this analysis.

Interstate Travel Center: High-Risk Investment

Both of the risk factors identified above make the Interstate Travel Center truck stop in Dallas the riskiest investment of the three. Though it remains a sound business plan with perceivable benefits and a likely path to profitability, too many uncertainties exist within the plan to warrant a low discount rate. The husband-and-wife management and ownership team is one cause for concern: if the business is not run effectively, the opportunities that exist in the proposed situation will fail to materialize regardless of how strong demand may be.

Market share presents another area of concern. Although the business plan suggests potential for growth in the trucking industry in and around Dallas, changes to highway projects or shipping patterns could drastically affect the enterprise's profitability. As a retail operation, the truck stop would not be able to pursue customers in other locations, meaning the owners have relatively little control over market share in the outlying regions of the Dallas metropolitan area. The fact that the owners are borrowing ninety percent of their projected startup costs through a traditional loan — rather than sharing ownership or seeking other forms of investment — also places the business at greater risk of catastrophic loss and failure, especially given that construction has not yet begun.

Acme Consulting: Medium-Risk Investment

The second of the two startups is also a somewhat risky venture, though less so than the Interstate Travel Center proposal. There are several key reasons that Acme Consulting remains a medium-risk proposal despite its clear advantages over the truck stop. First, it is still a startup with no proven track record as a company, even though its owners and officers have all worked in the chosen field previously. Second, competition for market share is fiercer — a consequence of the firm's relative advantage in being able to actively seek clients rather than wait for them to arrive. Third, the firm relies on convincing companies to outsource tasks that would normally be handled in-house, which carries a very different effect on a client's balance sheets. In essence, Acme must persuade its clients that it can perform certain functions better than the clients themselves — a challenge the truck stop does not face.

The likelihood of profitability is therefore a longer-term gamble with Acme Consulting than with the Interstate Travel Center, but the upfront risk is lessened by the founders' industry experience, lower startup costs, and more diverse sources of startup funding. These factors are what place this firm in the medium-risk category rather than the high-risk category, and the discount rate should reflect this median level of risk. The rate should also account for the amount of time projected to be necessary for true profitability to be achieved, as explicitly outlined in the business plan, as well as the heightened level of competition the company would face in the Silicon Valley market of the mid to late 1990s.

Conclusion

Across all three plans, risk level is determined by a combination of ownership experience, market share control, funding structure, and operating history. The Interstate Travel Center carries the highest risk and warrants the highest discount rate; Acme Consulting falls in the middle; and Silvera and Sons, as a proven and profitable enterprise pursuing a well-justified expansion, warrants the lowest discount rate of the three. Investors should weight their decisions accordingly, giving greatest confidence to the plan with the deepest operational track record.