Questions:

In preparing our Executive Summary, we’d like to include investment return targets and equity percentages. Could you clarify what you believe investors are looking for today in the way of cash on cash returns, overall IRR, exit strategy and ownership interest? Is a private placement memorandum necessary?

Answer:

Dear Mitch,

Investors are looking for something in the range of 6-15% return. Often we hear and work on 7% returns or even 11%. For property deals 15% is common now as well. I prefer between 8-13% for a deal, but often times gets lower or higher.

Sometimes deals are structured where the investor takes 25% of the stock/ownership, but only is ‘guaranteed’ an 11% return on their money for duration of the business. The deal is structured in a way that investors only receive 11% IRR during their ownership tenure (not 25%). However, if the company would be sold (and this is an exit strategy), the investors would be entitled to 25% of the asset profits.

This is not always the case. The above situation really applied to companies that have a strong management team and know what they are doing, and perhaps, preferably, have an operating history. Start ups will have a harder time with the above structure.

Without seeing their details it would be hard to determine what they should do. Also, a private placement memorandum (PPM) is usually required. In this economy, and in light of the financial turmoil stemming from the real estate market, it is always recommended to have a private placement memorandum (PPM) first and foremost for protectionary purposes, and second because it shows seriousness.

Hope this helps. Anything else let me know.

Thanks,

Paul

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