The Fuel for Your EB-5 Engine
Assumptions in Your Financial Analysis by Soyini Coke
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 employees, 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.
16 EB5 Investors Magazine