FINAL EXAM

FINANCE STRATEGY

Credit cards
Family
Personal savings
Investors
Crowd sourcing

RAISE CAPITAL

• Finance with DEBT- sell bonds, bank loans, credit cards
• Finance with EQUITY- (external equity), angel investors, venture capitalists
• Finance with EARNINGS- (internal equity), rolling over profit into biz

DEBT FINANCING

• Commercial Loans- from bank to biz
• Personal Loan- from bank to entrepreneur (used for biz)
• Vendors- suppliers to bi extending credit on goods
• Friends/Family- know you, flexible terms, debt forgiveness , bad blood
• They have no ownership in biz

WHY USE DEBT?

ADVANTAGES

• Lenders have little say in biz operations
• Loan payments are predictable
• Lenders get no portion of profit
• Debt increases return for biz owners

DISADVANTAGES

• Failure to pay leads to bankruptcy
• Repossed property of owner
• Interest expense lowers net income
• Repayment reduces $
• Lender expects compliance with loan contract

FINANCIAL INSTITUTE

• Lender decides who gets loan
• Collateral - repossed items taken if debt defaults
• Character - individuals payment history
• Capacity - cash flow must be sufficient to make payment
• Capital- amount owner has invested in biz
• Conditions- economic & industry conditions hard or easy securing loans, industry potential

SOURCES

#1 SOURCE = FOUNDER

• Friends & family
• Angel investor
• Venture capitalists

F&F - may sour relationships
Angels- give equity for share of biz
Venture capitalists- give to high potential firms, for large % and control of biz

INTERNAL EQUITY

• Earnings retained by biz
• + no payments to owners if no $, no forced bankruptcy, investors incentivized to succeed
• - fear of losing control, investors demand high rate of return, profit must be shared

$15,000 INITIAL CAPITAL

LEGAL ISSUES

• Legal structure
• Intellectual property

STRUCTURE

• Sole proprietorship 1owner
• Partnerships 2 owners
• Corporations 1+ owners

Sole proprietorship
+ owner retains all profits
Easy, cheap to form
Owner makes decisions

Sole proprietorship
- unlimited financial responsibility
Financing limits
Mgmt difficulty
Long hours

Partners
+ easy to form
Complimentary skills
Expanded financing capacity

Partners
- unlimited financial liability
Conflicts with partners

Corporations
+ limited liability
Specialized skills
Expanded financial capacity

Corporations
- difficult, costly to form/ dissolve
Tax disadvantage taxed on corporate earnings & dividends (excludes S corp, LLC)

TYPES OF CORPORATIONS

• C- Corp
• Sub chapter S- Corp
• Limited Liability Company LLC

C- corp includes most large firms, taxed twice
S- Corp 100 shareholder limit, no double tax
LLC- partnership features + corps, no double tax, less restrictive

INTELLECTUAL PROPERTY

TRADEMARK

• Word or phrase, symbol, design, combo- Identifies and distinguishes your goods/ services
• Can file to u.s. Patent & trademark office

COPYRIGHTS

• Protects original works of authorship- lit, music, software
• Owner- sole rights to print, reprint, revise, sell, distribute, record, perform work
• Author life + 70 years
• Applies to published, unpublished work

PATENT

• Protects invented process or product
• File date + 20 years
• Utility- process or improvement
• Plant- variety of plants
• Design- looks 14 years

AMERICA INVENTS ACT 2011

• First major patent law change since 1952
• First to invent switched to first to file
• Fees changed- reduced fee for micro- entities

HARVEST

Harvest (sell)
Entrepreneur quits managing biz, loses equity stake
May keep stock/ cash in exchange for biz
May take many years

LIQUIDATION

• Firms assets sold off
• Closes- done when biz fails

MAINTAIN

• Keep operations the same
• Makes sense if profitable, growth limited by owners desire to grow
• Owner may exit day-to-day, or remain manager

GROW

• Internal
• Licensing
• Franchise
• Aquire others

DETERMINE VALUE

• Compare similar businesses
• Multiple of earnings, cas flow
• New worth ( assets - liabilities)
• Net present value - NPV discounted cash flow

HARVEST & EXIT STRATEGY

• Increase free cash flow
• MBO management buyout
• ESOP employee stock ownership plan
• Being Aquired
• IPO Initial Public Offering

Increase Free Cash Flow
+ retain ownership, don't need to find buyer
- may pay high tax, can take long time

Management Buyout MBO
Owner sells to Manager
+ limits search for buyer, worth more to person who knows how to run it
- Manager may not have enough money, or lower profits of firm to purchase it below value

Employee Stock Ownership Plan
Buy firm stock for retirement
+ taxes principle and interest can be deducted, dividends paid on stock are tax deductible
- employees not diversified, lack of interest

Aquired
Sell to another company or individual
+ owner can sell out completely, or partially
- finding buyer difficult
Long selling/ negotiating process

Initial Public Offering
Sell company on stock market
+ profitable way to harvest, owner can exit completely or partially
- difficult and expensive
Not feasible for vast number of firms

MANAGING RISK

Goals Of Managing Risk
1. Avoid/ Minimize financial loss, that could hurt firm and lead to failure

2. Minimize costs of failure ( financial/ non- financial) to owner if firm fails

AVOID FINANCIAL LOSS/ BIZ FAILURE

• Structure fixed costs to be as low as possible
• Get insurance protect against risk, theft, damage, lawsuits
• Planning and market research before and after starting biz
• Diversify products and services

Minimize Cost of Failure to Owner
Start small, grow slowly
Start biz part-time
Join other cofounders
Form LLC
Pre sale offerings before starting biz
Shift risk to suppliers, avoid purchasing assets that are hard to sell, or lose value

Untitled Slide