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12-2Financing the Business Criteria for evaluating appropriateness offinancing alternatives: Amount and timing of funds required. Projected company sales and growth. Three types of funding: Early stage financing. Development financing. Acquisition financing.
12-3Table 12.1 - Stages of BusinessDevelopment Funding
12-4 Risk capital markets provide debt andequity 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 onlyfor high-potential ventures.Financing the Business (cont.)
12-5Informal Risk Capital It consists of a virtually invisible group ofwealthy investors (business angels). Investments range between $10,000 to$500,000. Provides funding, especially in start-up(first-stage) financing. Contains the largest pool of risk capital inthe United States.
12-8Venture Capital Nature of Venture Capital A long-term investment discipline, usuallyoccurring over a five-year period. The equity pool is formed from the resources ofwealthy limited partners. Found in: Creation of early-stage companies. Expansion and revitalization of businesses. Financing of leveraged buyouts of existing divisions ofmajor corporations or privately owned businesses. Venture capitalist takes an equity participationin each of the investments.
12-9Figure 12.1 - Types of Venture-Capital Firms
12-10Figure 12.3 - Percentage of VentureDollars Raised by Stage in 2008
12-11 Venture-Capital Process Objective of a venture-capital firm - Generationof long-term capital appreciation through debtand equity investments. Criteria for committing to venture: Strong management team. A unique product and/or market opportunity. Business opportunity must show significant capitalappreciation.Venture Capital (cont.)
12-12Figure 12.4 - Venture-CapitalFinancing: Risk and Return Criteria
12-13 Venture-capital process can be brokendown into four primary stages: Stage I: Preliminary screening – Initialevaluation of the deal. Stage II: Agreement on principal terms -Between entrepreneur and venture capitalist. Stage II: Due diligence - Stage of dealevaluation. Stage IV: Final approval - Document showingthe final terms of the deal.Venture Capital (cont.)
12-14 Locating Venture Capitalists Venture capitalists tend to specialize eithergeographically by industry or by size and type ofinvestment. Entrepreneur should approach only those thatmay have an interest in the investmentopportunity. Most venture capital firms belong to the NationalVenture Capital Association.Venture Capital (cont.)
12-15Table 12.6 - Guidelines for Dealingwith Venture Capitalists
12-16Table 12.6 - Guidelines for Dealingwith Venture Capitalists (cont.)
12-17Valuing Your Company Factors in Valuation Nature and history of business. Economic outlook- general and industry. Comparative data. Book (net) value. Future earning capacity. Dividend-paying capacity. Assessment of goodwill/intangibles. Previous sale of stock. Market value of similar companies’ stock.
12-18 Ratio Analysis Serves as a measure of financial strengths andweaknesses of the venture but should be usedwith caution. It is typically used on actual financial results. Provides a sense of where problems exist in thepro forma statements.Valuing Your Company (cont.)
12-23 General Valuation Approaches Assessment of comparable publicly heldcompanies and the prices of these companies’securities. Present value of future cash flow. Replacement value. Book value. Earnings approach. Factor approach. Liquidation value.Valuing Your Company (cont.)
12-25Table 12.7 - Steps in Valuing YourBusiness and Determining Investors’Share
12-26Evaluation of an Internet Company Qualitative portion of due diligence carriesmore weight. Focus is more on the market itself. Companys financial projections arecompared with the future market in termsof fit, realism, and opportunity. Management team is examined. Opportunities available in the investormarket are examined.
12-27Deal Structure Terms of the transaction between theentrepreneur and the funding source. Needs of the funding sources: Rate of return required. Timing and form of return. Amount of control desired. Perception of risks. Entrepreneur’s needs: Degree and mechanisms of control. Amount of financing needed. Goals for the particular firm.
12-28Going Public Selling some part of the company byregistering with the Securities andExchange Commission (SEC). Resulting capital infusion provides the companywith: Financial resources. A relatively liquid investment vehicle. Company consequently gains: Greater access to capital markets in the future. A more objective picture of the public’s perception ofthe value of the business.
12-29Table 12.8 - Advantages andDisadvantages of Going Public
12-30Timing of Going Public andUnderwriter Selection Timing Is the company large enough? What is the amount of the company’s earnings,and how strong is its financial performance? Are the market conditions favorable for an initialpublic offering? How urgently is the money needed? What are the needs and desires of the presentowners?
12-31 Underwriter Selection Managing underwriter - Lead financial firm inselling stock to the public. Underwriting syndicate - A group of firmsinvolved in selling stock to the public. Factors to consider in selection: Reputation. Distribution capability. Advisory services. Experience. Cost.Timing of Going Public andUnderwriter Selection (cont.)
12-32Registration Statement andTimetable “All hands” meeting - Preparing a timetablefor the registration process. First public offering requires six to eightweeks. The SEC takes six to 12 weeks to declarethe registration effective.
12-33 Reasons for delays: Heavy periods of market activity. Peak seasons. Attorney’s unfamiliarity with federal or stateregulations. Issues arising over requirements of the SEC. When the managing underwriter isinexperienced.Registration Statement andTimetable (cont.)
12-34 SEC attempts to ensure that the documentmakes a full and fair disclosure of thematerial reported. Registration statement consists of: Prospectus. Registration statement. Most initial public offerings will use a FormS-1 registration statement.Registration Statement andTimetable (cont.)
12-35 Cover page Prospectus summary Description of thecompany Risk factors Use of proceeds Dividend policy Capitalization Dilution Selected financialdata Business,management, andowners Type of stock Underwriterinformation Actual financialstatements.Registration Statement andTimetable (cont.)Prospectus
12-36 The Registration Statement Information regarding: Offering. Past unregistered securities offering of the company. Other undertakings by the company. Includes exhibits: Articles of incorporation. Underwriting agreement. Company bylaws. Stock option and pension plans. Initial contracts.Registration Statement andTimetable (cont.)
12-37 Procedure Preliminary prospectus (red herring) can bedistributed to the underwriting group. Deficiencies are communicated throughtelephone or a comment letter. Pricing amendment - Additional information onprice and distribution is submitted to the SEC todevelop the final prospectus. Waiting period - Time between the initial filingand its effective date is usually around 2 to 10months.Registration Statement andTimetable (cont.)
12-38Legal Issues and Blue-SkyQualifications Legal Issues Quiet period – 90-day period in going publicwhen no new company information can bereleased. Blue-Sky Qualifications Blue-sky laws - Laws of each state regulatingpublic sale of stock. May cause additional delays and costs to thecompany. Many states allow their state securitiesadministrators to prevent an offering from beingsold in their state.
12-39After Going Public Aftermarket Support Actions of underwriters to help support the priceof stock following the public offering. Relationship with the Financial Community Has a significant effect on the market interestand the price of the company’s stock.
12-40 Reporting Requirements The company must file: Annual reports on Form 10-K. Quarterly reports on Form 10-Q. Specific transaction or event reports on Form 8-K. Company must follow proxy solicitationrequirements.After Going Public (cont.)