Fitting the Pieces of the Financing Puzzle Together
Financing a Small Business - Modest Growth Figure 9.1 Pre-launch Start-up Growth Transition Bootstrapping Self, friends, and family Equity financing Debt financing
Financing a High-Growth, High-Potential Venture Figure 9.2 Pre-launch Start-up Growth Transition Bootstrapping Seed financing from angels Equity financing from VCs Debt financing
Outline: Chapter 10 Start-up Financing From the Entrepreneur, Friends and Family
Advantages and Disadvantages of Self-financing
Friends and Family Financing
Structure of Funds Invested
Most Common Sources of Financing Figure 10.1 Pre-launch Start-up Growth Transition Self, friends, and family
Advantages and Disadvantages of Self-Financing Table 10.1 Copyright 2009 Cornwall, Vang & Hartman Advantages Disadvantages Relative ease of securing funding May limit size and scope of start-up Avoid complexity created by adding partners May limit ability to grow Better alignment with entrepreneur’s aspirations Increases exposure to personal risk from business failure No dilution of profits or gains Entrepreneur may lack all necessary experience, contacts, skills, and/or knowledge Eventual exit process is often simpler
Percentage of ownership to the venture capitalist.
The nature of the investment such as loan, stock, warrants, etc.
Governance rights of the venture capitalist.
Right to eventually register shares for a public offering.
Remaining conditions to be met by the entrepreneur such as periodic reports, financial statements, etc.
An estimate of valuation of the company.
Specific requirements on what the money is to be used for or specific assets that must be purchased with the funds.
Initial Public Offering Advantages Disadvantages Diversification and liquidity Reporting costs Ability to raise new cash Disclosure of information Valuation Maintenance of control Future business deals Publicity
The process of preparing for the transition of both the entrepreneur and the business
Exit Through Ownership Transfer Type of Exit Advantages Disadvantages Asset Sale Cash sale Immediate tax on full sale Clean break Lower face value sale price Earn-out possible Stock Sale Higher face value of sale price Potential volatility of stock from sale Tax deferment of sale price Restrictions on sale of stock
Exit Through Partial or Limited Transfer Type of Exit Advantages Disadvantages Merger Potential synergies Cultures may clash Tax deferment of sale price Limited opportunity for immediate cash IPO Taking some cash out possible Limits on sale of stock Can bring in professional management
Exit Through Partial or Limited Transfer (Continued) Type of Exit Advantages Disadvantages Strategic Alliance Reduces risk to existing value May be long time, if at all, to actual exit ESOP Can maintain business culture May be long time, if at all, to actual exit Family Business Transfer Can maintain business culture Challenges of generational succession
Exit Through Bankruptcy Type of Exit Advantages Disadvantages Bankruptcy Orderly end to business Ethical challenges Results in no realization of wealth from business Can hurt entrepreneur’s ability to fund future deals
Exit Through Liquidation Type of Exit Advantages Disadvantages Liquidation May result in more value, especially for service business No value for going concern Can be viewed as “failure”
Set specific financial goals, and the timeframe to achieve these goals, based on owners’ aspirations related to wealth
Establish a specific plan to meet financial goals
Begin external audit or review
Evaluate possible exit options
Figure 14.4 Sale Process of a Business Initial Inquiry Letter of Intent Deal Price and Basic Structure Agreed Upon Purchase Agreement and Closing Due Diligence 10 % of deals proceed to next stage 50 % of deals proceed to next stage 50 % of deals proceed to next stage