3.1.1 What Is the Investment Case?

Welcome to On Judgement. DailyCup has loyal customers and excellent coffee. A fictional seller asks £300,000 for its equity. What would turn your admiration into a reasoned investment case? Take a first view. You can change it when you have considered the evidence.

A company description tells us what the business does. An investment case explains why a particular claim might be attractive at a stated price, for a stated purpose and horizon. Begin by identifying the decision-maker and alternatives. This course uses hypothetical research decisions: investigate, wait, negotiate or decline. No real money is required. A persuasive presentation is useful only if its reasoning can survive examination.

State the claim, supporting evidence and reasoning that connects them. Identify assumptions about demand, competition, costs, reinvestment and cash generation. Compare a value estimate with price, then describe risks and contrary evidence. A case should make clear which parts are observed, calculated, forecast or unknown. An appealing founder or familiar product can inform research without replacing that chain.

Replace “DailyCup will grow” with a proposition that could be checked: comparable outlets can sustain paid transactions and contribution after promotion costs over the next twelve months. Specify the metric, population and period. Some uncertainties remain even after careful research. Testability does not require pretending every long-term question has a single easy measurement; it requires showing what evidence would strengthen or weaken the view.

The same business can present different opportunities at different prices. An estimate above price is not guaranteed upside: the forecast may be wrong, capital may be locked up and the investor may need cash sooner. A useful case states a conditional next step and the most important missing evidence. It should distinguish “I like the business” from “this price and risk fit this purpose”.

Let's work through One business, two asking prices. For an original teaching illustration, assume sustainable annual cash available to all capital providers is £25,000–£40,000 forever, with no growth and all necessary reinvestment included. Use a 10% required return. Assume no debt, excess cash or other claims. Compare asking prices of £300,000 and £500,000. Pause here and try the calculation or reasoning before continuing.

Illustrative value range = annual cash / required return = £250,000–£400,000. At £300,000, the gap ranges from −16.67% to +33.33% relative to price. At £500,000, both endpoints are below price: gaps −50% to −20%.

The range is conditional, not a probability interval or a forecast return. Even at £300,000, the evidence has not established that the upper end is the right expectation.

Now try the choices in this lesson. If your answer changes, identify the reason. Make a conclusion testable and conditional. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.