Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter 5 Growing the Business

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Need for GrowthNeed for Growth Shareholder ValueShareholder Value Benefits of GrowthBenefits of Growth Growth StrategiesGrowth Strategies

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Need for Growth Essential to a company’s successEssential to a company’s success –Private company owners expect profits, cash flow, and ROI to increase –Stockholders expect the price of their stock to rise Growth company’s earnings increase at least 15% each yearGrowth company’s earnings increase at least 15% each year

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Shareholder Value Shareholder Value = Market ValueShareholder Value = Market Value Market ValueMarket Value –Public Company Current market price of common stock multiplied by number of shares outstanding –Private Company Sale price of the company on the open market

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Public Company Goals Increase earnings per share (EPS)Increase earnings per share (EPS) –EPS = EBIDTA / Shares of Common Stock Increase the company’s stock multipleIncrease the company’s stock multiple –Multiple = Current Market Price / EPS Increase the market price of common stockIncrease the market price of common stock

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Risk and Reward Investors are risk averseInvestors are risk averse –The greater the risk, the higher the ROI demanded by investors BetaBeta –Market-related risk measurement –Market beta = 1

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Private Company Goals Increase cash flowIncrease cash flow Generate a favorable return for ownersGenerate a favorable return for owners

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Benefits of Growth Clear career paths for employeesClear career paths for employees Attract qualified employeesAttract qualified employees Increase market shareIncrease market share Limit new competitionLimit new competition Diversify riskDiversify risk

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Growth Strategies Increase sales and Productivity of Existing PropertiesIncrease sales and Productivity of Existing Properties –Increase Profit Margin –Increase sales –Reduce expenses –Increase labor productivity –Reduce credit card commissions

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Growth Strategies Expansion of Physical FacilitiesExpansion of Physical Facilities –Focus on current or new markets –Requires large quantities of new capital –Earnings of additional assets must be greater than the company’s cost of capital If earnings are lower, earnings per share are diluted

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Growth Strategies FranchisingFranchising –Sell the rights to a brand in a specific location/market for a stated number of years –Franchisees pay: Franchise fees Franchise royalty fee Ancillary services –Marketing, training, purchasing fees, etc.

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Franchising BenefitsBenefits –Greater distribution system –Rapid growth without large amounts of capital –Higher profit margins DisadvantagesDisadvantages –Risk of not being able to control brand standards –Unable to control quality and consistency of the product and services

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Growth Strategies Management ContractsManagement Contracts –Operate properties for owners without management capabilities –Available primarily to lodging companies –Fees 3% to 5% of total sales Incentive fee based on a percentage of operating profit –Disadvantage Risk of contract being terminated

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Growth Strategies Mergers and AcquisitionsMergers and Acquisitions –Available to large public companies –Must have substantial amounts of capital –Funded by: Debt Existing equity Selling new shares of stock Bartering

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Growth Strategies Initial Public Offering (IPO)Initial Public Offering (IPO) –Utilized when: a company is ready for rapid growth a company’s potential future value is much greater than its current value

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved IPO Process 1.Investment banker manages process 2.Law firm writes prospectus 3.Accounting firm prepares certified audits for prior three years 4.Road show 5.Stock offering is priced 6.Management meets with the stock exchange

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Investment Banker Plays important role in the IPO processPlays important role in the IPO process –Before stock is sold Helps value the company Establishes a price for the stock Manages the selling process –After stock is on the market Maintains a market for the stock

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Managing a Public Company Management at public companies have many responsibilitiesManagement at public companies have many responsibilities –Required to file reports with the SEC –Deal with Wall Street research analysts –Must report to: board of directors stockholders