Chapter 11-12-13-14-15

Hisrich
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Debt or Equity Financing

 Debt financing - Obtaining borrowed funds

for the company.
 Asset-based financing; requires some asset to
be used as a collateral.
 Borrowed funds plus interest need to be paid
back.
 Equity financing - Obtaining funds for the
company in exchange for ownership.
 Does not require collateral.
 Offers investor some form of ownership position.

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Debt or Equity Financing (cont.)

 Factors affecting type of financing:

 Availability of funds.
 Assets of the venture.
 Prevailing interest rates.
 All financing requires some level of equity;
amount will vary by nature and size of venture.

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Internal or External Funds

 Internally generated funds are most

frequently employed; sources include:
 Profits.
 Sale of assets and little-used assets.
 Working capital reduction.
 Accounts receivable.
 Short-term internal source of funds:
 Reducing short-term assets - inventory, cash,
and other working-capital items.
 Extended payment terms from suppliers.

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Internal or External Funds (cont.)

 Criteria for evaluating external sources of

funds:
 Length of time the funds are available.
 Costs involved.
 Amount of company control lost.

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Personal Funds

 Least expensive funds in terms of cost and

control.
 Essential in attracting outside funding.
 Typical sources of personal funds:
 Savings.
 Life insurance.
 Mortgage on a house or car.
 The entrepreneur’s level of commitment is
reflected in the percentage of total assets
that the entrepreneur has committed.
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Family and Friends

 Likely to invest due to relationship with

entrepreneur.
 Advantages - Easy to obtain money; more patient
than other investors.
 Disadvantage - Direct input into operations of
venture.
 A formal agreement must include:
 Amount of money involved.
 Terms of the money.
 Rights and responsibilities of the investor.
 Steps to be taken incase business fails.
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Commercial Banks

 Types of Bank Loans (Asset based)

 Accounts receivable loans.
 Inventory loans.
 Equipment loans.
 Real-estate loans.
 Cash flow financing (Conventional bank loans)
 Installment loans.
 Straight commercial loans.
 Long-term loans.
 Character loans.

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Commercial Banks (cont.)

 Bank Lending Decisions

 Based on quantifiable information and subjective
judgments.
 Decisions are made according to the five Cs of
lending- Character, Capacity, Capital, Collateral,
and Conditions.
 Review of past financial statements and future
projections.
 Questions are asked regarding ability to repay
the loan.

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 Chapter 12
Informal Risk Capital,
Venture Capital,
and Hisrich

Going Public Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Table 12.1 - Stages of Business
Development Funding

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Financing the Business (cont.)

 Risk capital markets provide debt and

equity to nonsecure financing situations.
 Types of risk capital markets:
 Informal risk capital market.
 Venture-capital market.
 Public-equity market.
 All three can be a source of funds for stage-
one financing.
 However, public-equity market is available only
for high-potential ventures.
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Table 12.2 - Characteristics of
Informal Investors

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Venture Capital

 Nature of Venture Capital

 A long-term investment discipline, usually
occurring over a five-year period.
 The equity pool is formed from the resources of
wealthy limited partners.
 Found in:
 Creation of early-stage companies.
 Expansion and revitalization of businesses.
 Financing of leveraged buyouts of existing divisions of
major corporations or privately owned businesses.
 Venture capitalist takes an equity participation in
each of the investments.
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Figure 12.1 - Types of Venture-
Capital Firms

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Valuing Your Company (cont.)

 Ratio Analysis
 Serves as a measure of financial strengths and
weaknesses of the venture but should be used
with caution.
 It is typically used on actual financial results.
 Provides a sense of where problems exist in the
pro forma statements.

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Valuing Your Company (cont.)

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Valuing Your Company (cont.)

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Valuing Your Company (cont.)

13-19
Valuing Your Company (cont.)

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Valuing Your Company (cont.)

 General Valuation Approaches

 Assessment of comparable publicly held
companies and the prices of these companies’
securities.
 Present value of future cash flow.
 Replacement value.
 Book value.
 Earnings approach.
 Factor approach.
 Liquidation value.

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Valuing Your Company (cont.)

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 Chapter 13
Strategies for Growth and
Managing the
Implications of Growth Hisrich
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Figure 13.1 - Growth Strategies Based
upon Knowledge of Product and/or Market

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Growth Strategies

 Penetration Strategy
 A strategy to grow by encouraging existing
customers to buy more of the firm’s current
products.
 Marketing can be effective in encouraging
frequent repeat purchases.
 Does not involve anything new for the firm.
 Relies on taking market share from competitors
and/or expanding the size of the existing
market.

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Growth Strategies (cont.)

 Market Development Strategies

 Strategy to grow by selling the firm’s existing
products to new groups of customers.
 New geographical market - Selling in new
locations.
 New demographic market - Selling to a different
demographic group.
 New product use - Selling an existing product,
which may have a new use, to new groups of
buyers.

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Growth Strategies (cont.)

 Product Development Strategies

 A strategy to grow by developing and selling
new products to people who are already
purchasing the firm’s existing products.
 Provides opportunities to capitalize on existing
distribution systems and on the corporate
reputation the firm has with these customers.

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Growth Strategies (cont.)

 Diversification Strategies
 A strategy to grow by selling a new product to a
new market.
 Backward integration - A step back (up) in the
value-added chain toward the raw materials.
 Forward integration - A step forward (down) in
the value-added chain toward the customers.
 Horizontal integration - Occurs at the same level
of the value-added chain but simply involves a
different, but complementary, value-added
chain.

13-28
 Chapter 14
Accessing Resources for
Growth from External
Hisrich
Sources
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Using External Parties to Help Grow
a Business
 Some of the mechanisms entrepreneurs can
use are:
 Franchising.
 Joint ventures.
 Acquisitions.
 Mergers.

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 Difference between Franchising &
Licensing

Licensing and Franchising Meaning. ...

Basically, franchising means that you're
allowing another person to duplicate your
business in another location, and
licensing is when you allow someone else
to sell your products.
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 Difference between Franchising &
Licensing
 Franchising is a way to scale a business
once it is successful and proven. It involves
finding franchisees with the skills
necessary to operate branches of the same
business. ... Licensing of intellectual
property (IP) is at the heart of
a franchise contract. So, in fact,
a franchise includes licensing

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 Difference between Franchising &
Licensing
 Licensing does not require registration,
whereas registration is a must in
the case of franchising. ... The licensor
has control on the use of intellectual
property by the licensee but has no control
over the licensee's business. However,
the franchisor exerts considerable control
over franchisee's business and process.
  

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Franchising

 An arrangement whereby the manufacturer

or sole distributor of a trademarked product
or service gives exclusive rights of local
distribution to independent retailers in
return for their payment of royalties and
conformance to standardized operating
procedures.
 The person offering the franchise is known as
the franchisor.
 The franchisee is the person who purchases the
franchise.
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Franchising (cont.)

 Advantages of Franchising—to the Franchisee

 Product acceptance - Has an accepted name,
product, or service.
 Management expertise - Managerial assistance
provided by the franchisor.
 Capital requirements - Up-front support can save
entrepreneur significant time and capital.
 Knowledge of the market - Offers experience in
business and market.
 Operating and structural controls – Helps in
standardization and administrative controls.

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Franchising (cont.)

 Advantages of Franchising—to the

Franchisor
 Expansion risk
 Allows venture to expand quickly using little capital.
 Business can be expanded nationally and even
internationally.
 Requires fewer employees than a non-franchised
business.
 Cost advantages
 Supplies can be purchased in large quantities to
achieve economies of scale.
 Ability to commit larger sums of money to advertising.

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Franchising (cont.)

 Disadvantages of Franchising
 Inability of the franchisor to provide services,
advertising, and location.
 Franchisor’s failing or being bought out by
another company.
 Difficulty in finding quality franchisees.
 Poor management can cause individual franchise
failures.
 The ability to maintain tight control over
franchises becomes difficult as their number
increases.
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Franchising (cont.)

 Types of Franchises
 Dealership - Acts as a retail store for the
manufacturer.
 Franchise that offers a name, image, and method
of doing business.
 Franchise that offers services.
 Changes that helped evolve franchising
opportunities:
 Good health.
 Time saving or convenience.
 Health care.
 The second baby boom.
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Investing in a Franchise

 Factors to be assessed before making the final

decision:
 Unproven versus proven franchise.
 Financial stability of franchise.
 Potential market for the new franchise.
 Profit potential for a new franchise.
 Franchisors are required to make a full presale
disclosure.
 The franchise agreement contains the
requirements and obligations of the
franchisee.
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Table 14.2 - Information Required
in Disclosure Statement

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Table 14.2 - Information Required
in Disclosure Statement (cont.)

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Joint Ventures

 A separate entity that involves a

partnership between two or more active
participants.
 Types of Joint Ventures:
 Between private-sector companies.
 Objectives - Entering new/ foreign markets, raising
capital, cooperative research, etc.
 Industry–university agreements.
 Created for the purpose of doing research.
 International joint ventures.

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Joint Ventures (cont.)

 Factors in Joint Venture Success:

 The accurate assessment of the parties involved
to best manage the new entity.
 The degree of symmetry between the partners.
 The expectations of the results of the joint
venture must be reasonable.
 The timing must be right.

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Acquisitions

 The purchase of an entire company, or part

of a company; the company no longer
exists independently.
 Advantages of an Acquisition
 Established business.
 Location.
 Established marketing structure.
 Cost.
 Existing employees.
 More opportunity to be creative.
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Acquisitions (cont.)

 Disadvantages of an Acquisition
 Marginal success record.
 Overconfidence in ability.
 Key employee loss.
 Overvaluation.
 Synergy
 “The whole is greater than the sum of its parts.”
 Synergy should occur in both the business
concept and the financial performance.

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Acquisitions (cont.)

 Structuring the Deal

 Involves the parties, the assets, the payment
form, and the timing of the payment.
 Two most common means of acquisition:
 Entrepreneur’s direct purchase of stock or assets.
 Bootstrap purchase of assets.

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Acquisitions (cont.)

 Locating Acquisition Candidates

 Brokers, accountants, attorneys, bankers,
business associates, and consultants may know
of candidates.
 Business opportunities in newspapers or trade
magazines.

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Mergers

 Key concern - Legality of the purchase.

 Process:
 Determine the merger objectives and resulting
gains for both companies.
 Carefully evaluate the other company’s
management.
 Determine the value and appropriateness of the
existing resources.
 Establishing a climate of mutual trust.
 Determine the value of a merger candidate.

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Figure 14.1 - Merger Motivations

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 Chapter 15
Succession Planning and
Strategies for Harvesting
Hisrich
and Ending the Venture
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Exit Strategy

 Exit strategies include:

 Initial public offering (IPO).
 Private sale of stock.
 Succession by a family member or a nonfamily
member.
 Merger with another company.
 Liquidation.

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Table 15.1 - Succession Planning
Tips

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Bankruptcy—An Overview

 Most common types of bankruptcies:

 Chapter 7 or liquidation (69% in 2008).
 Chapter 11 or reorganization (19% in 2008).
 Chapter 13 or installment payments (12% in
2008).

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Chapter 11—Reorganization

 Courts try to give the venture “breathing

room” to pay its debts.
 A plan for reorganization is prepared and
approved by the US Bankruptcy Court.
 Decisions made reflect one or a
combination of the following:
 Extension - Postpone claims.
 Substitution - Exchange stock for debt.
 Composition settlement - Debt is prorated to
creditors as settlement.

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Chapter 11—Reorganization (cont.)

 Surviving Bankruptcy
 Bankruptcy can be used as a bargaining chip to
voluntarily restructure and reorganize the
venture.
 File before failure of cash or revenue.
 Chapter 11 should be filed only if a chance of
recovery exists.
 Be prepared for examination of transactions for
fraud.

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Chapter 11—Reorganization (cont.)

 Maintain good records.

 Understand how protection against creditors
works.
 Transfer litigation to bankruptcy court.
 Prepare a realistic financial reorganization plan.

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Chapter 13—Extended Time
Payment Plans
 Individual creates a five-year repayment
plan under court supervision.
 A court appointed trustee receives money
from debtor.
 Bears responsibility for making scheduled
payments to all creditors.
 About two of every three Chapter 13 filers
ultimately fail to meet their planned
obligations, thus resulting in a Chapter 7
filing.
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Chapter 7—Liquidation

 The most extreme case of bankruptcy.

 Voluntary bankruptcy - Entrepreneur’s
decision to file for bankruptcy.
 Courts will require a current income and
expense statement.
 Involuntary bankruptcy - Petition of
bankruptcy filed by creditors without
consent of entrepreneur.

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Table 15.2 - Liquidation under
Chapter 7 Involuntary Bankruptcy

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Strategy During Reorganization

 The entrepreneur can speed up the process

by:
 Taking the initiative in preparing a plan.
 Selling the plan to secured creditors.
 Communicating with groups of creditors.
 Not writing checks that cannot be covered.
 Enhancing the bankruptcy process by:
 Keeping creditors abreast of how the business is
doing.
 Stressing the significance of creditors’ support
during the process.
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Table 15.3 - Requirements for
Keeping a Venture Afloat

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Table 15.4 - Warning Signs of
Bankruptcy

13-62
Starting Over

 Entrepreneurs are likely to continue starting

new ventures even after failing.
 Entrepreneurs who have failed tend to have
a better understanding and appreciation for
the need for:
 Market research.
 More initial capitalization.
 Stronger business skills.
 Business failure does not have to be a
stigma when seeking venture capital.
13-63
The Reality of Failure

 Important considerations for the

entrepreneur in case of failure:
 Consult with family.
 Seek outside assistance from professionals,
friends, and business associates.
 Do not hang on to a venture that will continually
drain resources.

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Business Turnarounds

 Learn to recognize the warning signs of

bankruptcy.
 Principles of a successful turnaround:
 Aggressive hands-on management.
 Management must have a plan.
 Action.

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