©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Money needs

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Kinds of money needs Seed money Start up capital Working capital Growth money Entrepreneurs, FFF (including angels) Lenders Angels, venture capital, IPO, retained earnings

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Sources of Capital: debt Debt financing: Loan: It usually requires some asset as collateral (car, house, plant, machine, land). Suppliers, leasing Credit cards Bonds 21.1 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Sources of Capital: equity Equity financing: Does not require collateral Offers the investors some form of ownership position in the venture © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Types of bank loans Accounts receivable loans Inventory loans Equipment loans Real Estate loans 21.1 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Cash flow financing Installment loans Straight commercial loans Long-term loans Character loans loans 21.1 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Private placement Types of investors Private offering Regulation D

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ You need money Personal Savings and earnings Slower and limited growth Others people’s money Debt Equity Credit card Friends and family Suppliers and others BanksSBA No SBA Faster and larger growth Friends and family Corporations Angels Venture capital Bonds

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Sources: 21.1 © 2004 Ewing Marion Kauffman Foundation TimeCostControl SourcesShortLongFixedFloating% profitsEquityCovenantsVoting SelfXXXX Family and friendsXXXXXXXX Suppliers and tradeXX Commercial banksXXXX Gov. loan programsXXXXX R&D limited partner.XXXX Venture capitalXXXX Private equity place.XXX Public equity offer.XXX Other gov. programsX

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Bootstrap financing

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Stages of business development funding Early stage financing Seed capitalRelatively small amounts to prove concepts and finance feasibility studies Start-upProduct development and initial marketing, but with no commercial sales yet; funding to actually get company operations started Expansion and development financing Second stage Working capital for initial growth phase, but no clear profitability or cash flow yet. Third stageMajor expansion for company with rapid sales growth, at breakeven or positive profit levels but still private company Fourth stage Bridge financing to prepare company for public offering Acquisitions and leveraged buyout financing Traditional acquisitions Assuming ownership and control of another company LBOsManagement of a company acquiring company control by buying out the present owners Going private Some of the owners/managers of a company buying all the outstanding stock, making the company privately held again

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Business angels Equity investors willing to put, individually or increasingly as a group, from $50,000 to $1 or 2 mill. in a start up. About 150 groups in the United States. It contains the largest pool of risk capital. It is increasingly organized making more accessible to entrepreneurs. Boston a good place. Less specialized than venture capitalists. More patient than venture capitalists.

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Venture capital

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Business valuation (1): Factors to consider The nature and history of the business Outlook of the economy in general as well as the outlook for the particular industry Book value Future earnings Dividend-paying capacity of venture Assessment of goodwill and other intangibles Any previous sale of stock And the market price of the stocks of companies engaged in the same of similar lines of business

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Business valuation (2): Ratio analysis Liquidity –Current ratio = Current Assets / current liabilities –Acid test = (Current A. – Inventory)/current liabilities Activity ratios –Ave. collection period = accounts receivable/average daily sales –Inventory turnover = cost of goods sold/inventory Leverage ratios –Debt ratio = total liabilities/ total assets –Debt to equity ratio = total liabilities/ stockholder’s equity Profitability ratios –Net profit margin = net profit/net sales –Return on investment = net profits/total assets

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Business valuation (3): Approaches 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

©2001 Kauffman Center for Entrepreneurial LeadershipPLANNING AND GROWING A BUSINESS VENTURE™ ™ Business valuation: steps in valuing your business 1.Estimate the earnings after taxes based on sales in the 5 th year. 2.Determine an appropriate earnings multiple based on what similar companies are selling for in terms of their current earnings. 3.Determine the required rate of return. 4.Determine the funding needed. 5.Calculate, using the following formulas Future valuation Present value = (1+ i) n Where: Future valuation = total estimate value of company in five years i = required rate of return N = number of years initial funding Investors’ share = Present value