CHAPTER LEARNING OBJECTIVES
Canadian Entrepreneurship and Small Business Management Canadian 10th Edition Balderson
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CHAPTER 6: FINANCING THE SMALL BUSINESS
LO1. Discuss financing problems experienced by small businesses.
LO2. Identify the types of start-up capital the entrepreneur may require.
LO3. Explain the stages of venture funding.
LO4. Illustrate a method for determining the amount of capital required.
LO5. Identify the sources of equity and debt funds available to start and operate a small business.
LO6. Explain the considerations in obtaining equity or debt financing.
LO7. Discuss what elements to include when preparing a proposal to obtain financing for the small business.
ANSWERS TO SMALL BUSINESS IN ACTION QUESTIONS
6-1 DO CANADIAN ENTREPRENEURS PREFER AN APPLE SEED TO A FULL TREE?
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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1. If entrepreneurs knew all the facts, do you think they would be so quick to dismiss equity as a source of capital?
Answer: Student Choice
2. If you owned a growing business would you make use of equity financing from investors? Why, or why not?
Answer: Student Choice
3. Would you sell majority control of your business like Suleman did to access the capital to grow? Why, or why not?
Answer: Student Choice
6-2 CROWDFUNDING – UNDERSTANDING THE RULES CAN BE COMPLICATED
1. Given the rules associated with crowd-funding are you surprised by the growth?
Answer: Student Choice
2. Visit some of the crowd-funding sites above and review the investor and entrepreneur information. Did you find the information easy to follow? What websites seem to offer the best presentation of rules and procedures? How does the Canadian site differ from its American counterparts?
Answer: Student Choice
3. Review some of the opportunities for investment on some of the crowd-funding sites listed above? What ideas do you find most promising? Why? Do you notice any difference between the types of investment opportunities in Canada compared to the U.S. If so what are they?
Answer: Student Choice
6-3 NEURALITIC OFFERS ENTREPRENEURS A ROADMAP TO VC SUCCESS
1. Why do you think Neuralitic was successful in raising capital?
Answer: Student Choice – however students may mention that the product was innovative, they targetted investors who had invested in similiar products, they focused their presentation on the potential profitability of the company.
2. Do you think the sale of Neuralitic, a Canadian company, to a U.S. firm is a positive development? Why, or why not?
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
Prepared by Peter Mombourquette
Answer: Student Choice
3. If you were the owner of Neuralitic would you have preferred to keep the company for yourself, or would you have jumped at the opportunity to sell your shares at a profit to a larger company? Why?
Answer: Student Choice
6-4 DO CHARTERED BANKS LEND MONEY TO ENTREPRENEURS?
1. Do you think banks should be willing to lend money based on a strong business plan and credit scores alone? Why, or why not?
Answer: Student Choice
2. Since many angel investors make a healthy return on investing in start-ups, are banks missing out on an opportunity for profits by not investing in new or small companies? Why do you think banks are not doing this?
Answer: Student Choice
3. Since Canadian banks tend to be highly profitable and appear to benefit from some federal laws that limit competition, should they as a group be more willing to invest in small business given its importance to the Canadian economy. Do you think rather than invest in small business themselves that government should stipulate a percentage of bank loans be made to new businesses? Why, or why not?
Answer: Student Choice
6-5 LENDINGLOOP.CA – PEER TO PEER LENDING
1. Peer to peer lending has grown into a billion-dollar industry. Are you surprised how large the industry has become? What do you think are the reasons for the growth?
Answer: Student choice
2. The returns offered to lenders are actually higher for business loans than personal loans. Why do you think this is the case?
Answer: Student choice
3. Do you think its ethical to charge people 15% interest rate to borrow money when the banks are
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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charging much less?
Answer: Student choice
4. What type of companies do you think are most likely to be attracted to peer-to-peer lending?
Answer: Student choice
5. Lending Loop is not allowing start-ups to access their service. Why do you think this is the case? Do you think start-ups should be given access to peer to peer lending?
Answer: Student choice
6. The Canadian government has yet to regulate peer to peer lending for businesses. Should the government pass rules and regulations for the industry? Why or why not?
Answer: Student choice
ANSWERS TO DISCUSSION QUESTIONS
1. What is the cheapest source of funds? When all other sources turn down your request for funding, what source is most likely to say yes? Why is this the case?
Answer: Equite, specifically owner's investment is the cheapest form of capital. The most likely source of investors is friends and family as they know the entrepreneur.
2. What are the advantages and disadvantages of debt and equity financing?
Answer: The advantages of equity capital as compared to debt financing include, interest obligation, expertise of the investor(s), expanded borrowing power and spreading risk. The disadvantages of using equity financing include diluting ownership, the increased possibility of disagreements, and the cost incurred in the issuance of the ownership interest. The potential advantages of debt financing as compared to equity capital are as follows: possible higher return on investment, deductibility of interest, flexibility, and ease of obtaining. The disadvantages include interest expense, additional paper work, and the lack of diversification of risk to other investors.
3. What do you think are the advantages and disadvantages of angel investors?
Answer: See some of the advantages of equity above. In addition angels usually provide advice and assistance in managing a company and they do not want control. The major disadvantages include disputes with investors.
4. Are investors on crowd-funding sites in need of some government protection, or do you agree that it is their money and they should be able to spend it as they see fit?
Answer: Student Choice
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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5. Should government provide loans for entrepreneurs starting new businesses? Should government guarantee loans for small businesses that are missing the necessary track record, assets, or other ingredients to obtain a commercial bank loan? What benefit do we, as a nation of taxpayers, receive from such loan guarantees?
Answer: Student Choice
6. An investor provides an entrepreneurial firm with the capital that it needs to grow. Over and above the capital, in what other ways can the investor add value to the firm? What are the possible downsides of having an angel or venture capitalist as an investor in the business?
Answer: Student Choice
ANSWERS TO EXPERIENTIAL EXERCISES
1. Indicate whether each of the following is a start-up cost (S), an ongoing operating cost (O), or both (B).
Answer:
2. Imagine you are preparing a business plan for a small manufacturing firm in your province or territory. Using Internet resources, determine what government programs are available for possible assistance. How could each program help your client’s business?
Answer: Answer will vary on student work
3. Search the Internet for services that provide access to business angels or informal investors. How do these sites work? If you were an entrepreneur looking for funding, how much would it cost to use this service? How many business angels are registered on the typical database? How many entrepreneurs are registered on the typical database? How effective do you believe these services are? (Use data, where possible, to back up your answer.)
Answer: Answer will vary on student work
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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4. Interview an employee at one of the government agencies that offer equity or debt financing to small businesses. Determine the purpose, the merits, and the weaknesses of that program.
Answer: Answer will vary on student work
5. Interview a banker and someone at the Canadian Youth Business Foundation to determine what he or she looks for in a loan application. Compare the differences.
Answer: Answer will vary on student work.
6. Instructors can form groups in class into an equal number, label each group as either venture capitalist or entrepreneur. Inform each group that their job is to negotiate a deal with one another based on the following information the entrepreneur has a company that has revenue of $2 million; expected annual growth is 25 percent a year for five years, and then 5 percent a year after that; looking for an investment of $5 million for 10 percent equity. Find out which VC firm and entrepreneur group negotiates the best deal.
Answer: Answer will vary on student work
7. Interview three small business owners about things they do (or have done) to bootstrap the financing of their business. How effective were these techniques? Be prepared to present this list to class and describe how the techniques work.
Answer: Answer will vary on student work.
8. Go to a directory of venture capitalists and ascertain what percentage of funds for a typical venture- capital firm are invested in seed, start-up, expansion or development, and acquisitions or leveraged buyouts. What criteria do venture capitalists report using in their initial screening of business proposals?
Answer: Answer will vary on student work.
CONCEPT CHECKS (NOT IN TEXT)
What problems are often the result of lack of management competence and experience?
Answer: Lack of management competence and experience can often result in such financing problems as the following: underestimating financial requirements, undercapitalization, lack of knowledge of sources of equity and debt capital, inability to obtain funds or low cost funds, lack of skills in preparing and presenting a proposal for financing to a lender, failure to plan in advance for future needs resulting in last minute financial crises, and poor financial control in payment of loan obligations.
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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What are some of the issues entrepreneurs should be aware of the following issues when trying to raise capital?
Answer: Entrepreneurs should be aware of the following issues when trying to raise capital: 1. How much do you need? 2. When will the funds be used? 3. How long will the money last? 4. Where can the money be raised and what type of financing (debt versus equity) will be used? 5 Do you need funds immediately? 6. Will I get anything else besides money?
What are some of the operating costs involved in determining the start-up capital needed?
Answer: Start-up capital includes initial inventory, deposits and first month's payment for payroll, utilities, rent, advertising, insurance, licenses and permits. Accounts receivable and any other operating cost which needs to be paid before revenues are generated should also be planned for.
Why is it important to determine the Owner's Net Worth?
Answer: An essential step in determining the amount of capital needed is to determine the Owner's net worth. This helps in determining the amount of funds the owner(s) has to invest in the company and will probably be required by a lending institution in order to borrow capital.
What are the two general sources of funds can be used to finance a small business?
Answer: The two general sources of funds are equity or ownership financing. The second is funds obtained from borrowing, usually referred to as debt financing (including trade credit). Many small businesses use both forms of financing to get established
What are the sources of equity financing for the small business?
Answer: Equity financing options include: 1. Personal funds and retained earnings; 2. Family and friends; 3. Crowd-funding; 4. Informal Risk-Capital or Angels; 5. Corporate investors; and 6. government programs.
What are the advantages and disadvantages of equity financing?
Answer: The advantages of equity capital as compared to debt financing include, interest obligation, expertise of the investor(s), expanded borrowing power and spreading risk The disadvantages of using equity financing include diluting ownership, the increased possibility of disagreements, and the cost incurred in the issuance of the ownership interest
What is the advantage of using personal funds or retained earnings?
Answer: These the least expensive funds in terms of cost and control, but they are absolutely essential in attracting outside funding, particularly from banks, private investors, and venture capitalists.
What is crowd-funding and what is a major disadvantage?
Answer: Crowd-funding occurs when an entrepreneur solicits small donations from the public to fund the start-up or growth of their company or social enterprise. A major constraint for
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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entrepreneurs who want to sell equity using crowd-funding is technically, it is not yet legal in North America. Currently, entrepreneurs who want to sell shares to the public in Canada have to create a prospectus, which is a document that explains the opportunity to the investor. Given that these are expensive and timely to create, many smaller companies and start-ups do not draft these documents. These entrepreneurs, rather than sell shares to the public, often target friends and family and accredited investors (angels and venture capitalists), who are exempt from the prospectus requirements when selling equity to raise funds.
What is the informal risk-capital market?
Answer: The informal risk-capital market is the most misunderstood type of risk capital. It consists of a virtually invisible group of wealthy investors, often called business angels, who are looking for equity-type investment opportunities in a wide variety of entrepreneurial ventures. Typically investing anywhere from $10,000 to $500,000, these angels provide the funds needed in all stages of financing, but particularly in start-up (first-stage) financing.
What are angel organizations?
Answer: A new trend that has emerged in angel investing over the last decade is the formation of angel clubs or associations. Angels use these clubs to network with other angels, share investment opportunities, and pool money to invest in start-up ventures.
What is bootstrap financing?
Answer: Bootstrap financing involves using any possible method for conserving cash
What are the advantages and disadvantages of debt financing?
Answer: The potential advantages of debt financing as compared to equity capital are as follows: possible higher return on investment, deductibility of interest, flexibility, and ease of obtaining. The disadvantages include interest expense, additional paper work, and the lack of diversification of risk to other investors.
What are the major sources of debt financing?
Answer: The sources of debt financing are, owners of the business, corporate lenders, regular lending institutions, and the government agencies.
What are the potential advantages and disadvantages of borrowing through government lenders?
Answer: Government agencies at both federal and provincial levels lend money, provide grants and counselling assistance to small business. The potential advantages of approaching a government agency as opposed to the other sources of debt financing are: they finance higher risk businesses, they may be more willing to rewrite loan terms and conditions, they may provide lower interest rates, and they may provide equity capital. The potential disadvantages of borrowing from government agencies are: they usually require more information, there tends to be a longer time period for the approval of a loan, more collateral may be required and most agencies exert more monitoring and control over the businesses they lend to.
Prepared by Peter Mombourquette
What criteria do lenders use in making a loan decision?
Answer: Most lenders will make the loan decision using the following criteria: the entrepreneur's management ability, the proposal itself, and the applicant's credit worthiness.
What can the entrepreneur do if he/she is unsuccessful in obtaining financing?
Answer: If the entrepreneur is unsuccessful in obtaining financing the proposal should be reevaluated and changes made so the proposal can be made more attractive to potential investors. Secondly, the entrepreneur could consider leasing instead of purchasing to reduce the amount of funds required.
VIDEOS
CBC Dragons’ Den Videos: Videos and notes are available on DVD and the Instructor Resources site
o Video Notes with questions have been prepared by Peter Mombourquette and are available on the Instructor Resources site.
Other Video Resources:
Centre to Entrepreneurship Education & Development (CEED): Subscribe to this YouTube channel here: https://www.youtube.com/channel/UCgxnMK3Kglw607FnhuZJixQ
Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA
Additional CBC video links:
o The Happy Baker - http://www cbc ca/dragonsden/pitches/the-happy-baker
o EnRICHed Academy - http://www.cbc.ca/dragonsden/pitches/enriched-academy
o UseMyBank - http://www.cbc.ca/dragonsden/pitches/usemybank
o Massage Addict - http://www cbc ca/dragonsden/pitches/massage-addict
GROUP PROJECT
While many of the experiential questions would work as group projects. Questions 2, 7, and 8 from this Chapter would make excellent group assignments/projects.
PART-ENDING AND COMPREHESIVE CASE SOLUTIONS
CASE SOLUTIONS FOR PART 2
Clark's Sporting Goods
Jensen Roofing
Conrad’s Photographer Supplies
Kelly's Grill
Second Cup
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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CLARK’S SPORTING GOODS
QUESTIONS AND SOLUTIONS
1. Estimate how much money Dave will need from outside sources to start his business.
It may be wise to bring the amount to 115,000 to cover contingency. 115,000 - 30,000 = 85,000 required own funds required from outside sources
2. Assuming Dave receives start-up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so how much?
In order to determine if an operating line is necessary Dave should prepare a four month cash flow statement as follows:
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
1. Sales Revenue - 100,000 is cost of merchandise sold in 4 months
- 100,000 + .6(100,000) = 160,000 in retail sales in 4 months
- 160,000 divided by 4 = 40,000/month
- 1/2 credit sales = 20,000/month
2. Interest - 85,000 @ 10% = 8,500 divided by 12 = 708.33
- every 4 months = 708.33 x 4 = 2,833.32
According to the 4 month operating cash flow Clark’s Sporting Goods will not experience a negative cash flow and so should not require an operating line of credit
3. Should Dave pursue debt or equity sources of funds to get started?
Solution
Dave's decision could be either debt or equity but should be based on the following factors:
1 The level of control he desires (equity funds will reduce the amount of control he has over the business).
2 Whether the business can service the interest costs of debt The cash flow indicates the business may be able to service the interest costs.
3 Whether he could obtain debt Based on his current equity, his education, and background of his father, he should be able to borrow the needed funds.
JENSEN ROOFING
QUESTIONS AND SOLUTIONS
1. Evaluate the Jensen Roofing business plan from an investor and lender point of view.
Solution
Robert's business plan contains several flaws that should concern both investors and lenders. They are as follows:
1. Robert should include an executive summary of the plan indicated in more detail what the plan shows The report would read better if it were written in the 3rd person He also should include more information on his background such as his experience, training, and skills that will contribute to the success of the business. Depending on the length of the plan a table of contents may be helpful.
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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2. Objectives - Robert does not a separate section describing his objectives and these should be specific and quantitative if possible. For example he could include sales or profit goals.
3. Market Approach - Although Robert has identified his target market geographically, he may want to segment the market further For example is there a certain socio-economic market he could focus on? He has indicated that he will do quality workmanship but needs to emphasize this more and show how he will communicate this point of difference to the public. Promotional plans should contain more detail relating to themes, frequency and specific media. The uncontrollable factors are not mentioned in the plan-a major weakness. A detailed analysis of the competition including strengths and weaknesses should be included. A review of the effect that the economy, climate, legislation and industry trends regarding homebuilding and repairs should also be included.
4. Physical Facilities - Robert should identify who the suppliers are and also indicate the source for the cost figures. It may be useful to explain why locating the business in his home is appropriate for this type of business.
5. Financial - There are several weaknesses in this plan financially. Robert has not included sources for the numbers on the income statement nor has he included the source for the average roofing job ($8000). He should also indicate where he obtained the initial estimate of a 10% market share as well as the rationale for this increasing to 20% within 5 years. Objective data should be used to confirm these percentages.
He needs to be more thorough in evaluating the competition, (as stated earlier) as this will have a major impact upon market share. The financing plan suggests equity of less than 20%. With a small service business it is very unlikely that financing would be possible with so little equity. A lender would also like to see a cash flow statement indicating how the loan will be serviced. An investor may like to see a balance sheet to get an idea of the value of the business. All statements should be projected to the future as the lender and investor would want to see the long term performance of the business.
6. Legal - Robert should perhaps indicate the reasons that the business will initially be a sole proprietorship instead of an incorporated company.
7. Personnel - Although this business will not employ a lot of people, Robert should still include plans for hiring, training, policies, supervising, and evaluating. The estimated number of personnel should relate to the wage costs as set out in the financial statements.
In general Robert has prepared a brief outline for his business but to qualify as a business plan much more detail is required, particularly in the financial area.
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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CONRAD’S PHOTOGRAPHER SUPPLIES
QUESTIONS AND SOLUTIONS
1. If the Bingley’s decided to organize a photography store from scratch discuss how this decision would compare to the other two methods of getting into the business on a.risk b.independence c.information requirements.
Solution
The comparison of these methods of entering business should include:
a. Independence- Organizing allows the most independence as the Bingley’s can determining the type of business they want to establish. If they buy the business from Shelly Conrad they will have to accept what is there. With a franchise they will have the influence/guidance in setting up the business but also in ongoing operations.
b. Risk- Organizing presents the greatest risk of all of the methods of starting a business. There is no guarantee that demand exists for the business. There will likely be start-up problems that can’t adequately be planned for By buying the business there is an established track record for sales and the bugs have been worked out of the operations by the previous owner. Risk is also lower with the franchise due to the assistance provided and the name of the franchise.
c. Information Requirements- This will be greater for organizing as there is no information on part performance to use in the projections. Primary data will be required to prepare the feasibility analysis and cost estimates etc. In buying the business past financial statements provide a good idea of future performance and a franchiser has other prototype examples to draw from to help with information.
2. In evaluating this business in order to purchase it, discuss concerns you would have about a) the previous owner b) financial information c) assets of the business.
Solution
Concerns might be as follows:
a. Previous Owner- Richard and Karen should determine the real reason that Shelly is selling the business. They should also identify how much of the success of the business is due to Shelly’s prominence in the community. They could explore whether Shelly will help them with management assistance or financing and be assured that she will not open a competing business in the near future.
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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b. Financial Information- Richard and Karen should ensure that the statements are an accurate representation of the business. Questions regarding the method of depreciation, extraordinary items, financial treatment of repairs, the amount of the owner’s salary or drawings, and the treatment and terms of debt could all assist in determining this. (For example where are the interest costs on the debt?)
c Assets of the Business- To better understand the value of the assets of the business the following assets should be evaluated. Inventory should be valued. Accounts receivable should be aged. Goodwill should not be in the statement until it has been purchased. Other assets such as equipment made need to be appraised.
3. Assuming the information in the financial statements is accurate, is Shelly Conrad’s asking price a reasonable one? Use the book value and capitalization of earnings methods to help you answer this question.
Solution
Shelly is asking $80,000 for this business. Suitability of this price could be determined by looking at the Book Value and Capitalization of earnings.
a. Book Value
Owner’s Equity = $29,000 which is the book value
b. Capitalization of Earnings
Earnings (profit) / Capitalization rate
11,000 / 0.10 = 110,000 if 10% is used
11,000 / 0.08 = 137,500 if 8% is used
If these two estimates are combined the asking price is reasonable. However a caution to the Bingley’s would be that most of this price is based on earnings continuing at the same levels as the asset value is low. Therefore they should carefully evaluate the earnings trends and ensure that they will continue.
4. There is ate least 1 adjustment to the balance sheet and 2 to the income statement that should be made to make these statements more accurate and which will affect the calculation of the price of the business. Make the adjustments and re-evaluate the asking price based on your adjustments.
Solution
The Balance sheet adjustment is that goodwill of $12,000 should be dropped. Good will cannot appear on a financial statement unless someone has paid for it and Shelly started the business so no goodwill exists at this time. This means that the owner’s equity would be $17,000. (29,000 – 12,000)
The adjustment to the income statement is that interest costs as a result of the debt should appear. The interest on the $60,000 debt at 8% would be $4,800 per year and should appear as an expense. The adjusted income would be $6,200 (11,000-4,800) and the capitalization of earnings would be 6200 / 0.10 = $62,000 These two adjustments would have the effect of dropping the value of the business significantly.
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
Prepared by Peter Mombourquette
KELLY'S GRILL
QUESTIONS AND SOLUTIONS
1. How well has Kelly thought out and prepared for her decision to start her own restaurant?
Solution
Although she has thought about this a lot and done some investigation there are several things she may have overlooked.
a. She has no management and little working experience in the restaurant business.
b. She seems to be under the impression that running the business will give her more time with her family. This is not true at least during the first few years.
c. It does not look like she realizes the extra risk involved in running her own business.
d. Has she realized the fringe benefits she now receives (pension, UIC, etc.) that she will be foregoing?
e. She has not done much of an industry analysis or market share analysis for her business.
f. Has she considered the consequences of failure, i.e. because her house has been remortgaged?
g. Does she have the skills necessary to run a business? i.e. financial
2 Based on the information provided, which of the choices open to Kelly would you advise her to make?
Solution
1. Calculate market potential.
- families x food expenditure/month x 12 = $26,880,000
2. Calculate market share.
- outlets x average size = 165,000 sq. ft.
*Note: Although Kelly doesn't have the information, a better measure of market share might be for:
a. estimated traffic volume at mall.
b present patronage figures at restaurant
c. average traffic and patronage figures given by the franchisor.
A. 3,000 x 26,880,000 = 480,000
168,000
B 1,500 x 26,880,000 = 242,262
166,500
C 2,000 x 26,880,000 = 321,916
167,000
Note: Each of these amounts should be adjusted for non-quantitative factors such as strength of competition, distances people might travel to patronize, specialized restaurants, etc
3. Projected Income
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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Operating Statement
Based on this analysis, the most profitable option would be the shopping mall. This is also closer to her home and gives her more independence than the franchise. As it is a new mall, however, there is more risk associated with this option
3. What additional information should she obtain before making this decision?
Solution
Some of the things Kelly may want to investigate are:
1. Shopping Centre
- Where is the site located in the mall?
- What type of customer will patronize the mall?
- What other competition will there be?
- Are there any complimentary stores?
- What is the proposed traffic for the mall?
- Will people not shopping in mall be attracted to the restaurant?
- What regulations in the mall might affect Kelly's operations (hours, advertising, etc.).
2. Downtown
- What kind of neighbourhood is restaurant in?
- What other competition is close by?
- Is parking necessary? Is there any?
- Will restaurant be open in evenings?
- Can she get financial statements from owner to better assess financial position?
- Can she get some indication of state of lease negotiations which are coming up?
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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3 Franchise
- What kind of assistance will be given, i.e. location selection, training, advertising, etc.?
- How happy are other franchises of this chain?
- Can Kelly receive financial information about the franchise if it is not well-known
- What traffic studies and research have been done by the franchise?
SECOND CUP
QUESTIONS AND SOLUTIONS
1. What further analysis should be done before making this decision?
Solution
The analysis that should be carried out is found in Appendix 6-B at the end of chapter 6. Such information may be obtained by contacting the franchiser, industry associations, professionals such as an accountant or lawyer, government agencies, and by talking with other franchisees. In addition to the specific details of the franchising operation a determination should be made regarding the value of the name of the franchise, an indication of problems with the franchise, and an evaluation of what the franchiser provides for the franchisee.
2. What specific question about the financial information as presented by Second Cup should be asked?
Solution
Some of the questions that might be asked about the financial statements as provided by the franchiser relate primarily to their applicability to Ken and Mary’s situation Specifically, these might include the opening case balance, whether the sales level would apply, expenses such as rent, utilities etc, the salaries, and interest costs.
COMPREHENSIVE CASE SOLUTION
Dan Kim - Part III Solution
1. What items have been overlooked by Dan with both the start up cost and income statements for the Ladder Rail?
Items that have been overlooked by Dan include:
a. Start-up costs such as permits, licenses, and a contingency (usually about 10% in the construction industry).
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
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b. Operating expenses such as advertising/marketing, repairs, fuel for the truck, interest costs on the loan he is hoping to obtain, and a contingency amount
c He should also obtain sources for each number that he uses in his estimates.
2. What additional statements would the banker likely require?
A statement that his banker will want to see is the cash flow statement This statement will indicate whether Dan’s business will be able to make the loan payments and service the interest costs.
3. Do you think Dan should consider other forms of capital like equity? Why, or why not?
Student Choice – however students may mention equity is cheaper, comes with no interest payment and some investors may bring knowledge to the company.
4. What advantages of angel financing is Dan missing out on in his assessment of this specific type of an investor? How might Suzie persuade him to change his mind?
Student Choice – however students may mention that angels bring knowldege and contacts.
5. Would crowd-funding be a good idea for Dan to pursue? What are some of the potential advantages and disadvantages of this strategy?
Student Choice – however students may mention that crowd-funding allows the entrepreneur to test market the product, the investment comes with no interest payments and people who like the idea will share it with their friends and family.
Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition
Prepared by Peter Mombourquette