13 - 1Copyright © 2009 The McGraw-Hill Companies, Inc., All Rights
Reserved.McGraw-Hill/Irwin
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Chapter
13
Entrepreneurial Finance
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Entrepreneurial Finance
• Three core principles of entrepreneurial finance• More cash is preferred to less cash• Cash sooner is preferred to cash later• Less risky cash is preferred to more risky cash
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Bargaining Power
• Three vital corollaries determining bargaining power• Burn rate• Time to OOC (Out Of Cash)• TTC (Time To Close)
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Free Cash Flow
• The cash flow generated by a company or project is defined as follows:• Earnings before interest and taxes (EBIT)• Less tax exposure (tax rate times EBIT)• Plus depreciations, amortization, and other non-
cash charges• Less increase in operating working capital• Less capital expenditures
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Operating Working Capital
• Operating working capital can be defined as follows:• Transactions cash balances• Plus accounts receivable• Plus inventory• Plus other operating current assets• Less accounts payable• Less taxes payable• Less other operating current liabilities
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Factors Affecting Finance
• Accomplishments and performance to date
• Investor’s perceived risk
• Industry and technology
• Venture upside potential and anticipated exit timing
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Factors Affecting Financing
• Venture anticipated growth rate
• Venture age and stage of development
• Investor’s required rate of return or internal rate of return
• Amount of capital required and prior valuations of the venture
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Factors Affecting Finance
• Founders’ goals regarding growth, control, liquidity, and harvesting
• Relative bargaining positions
• Investor’s required terms and covenants
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MLI #1
• BUY/SELL BIDS Actual Bids
ScottPeterson
Cash $523,000 $550,795Non-competition agreement (PV)* 192,146
236,278Adjusted purchase price $715,146 $787,073
• *Represents annual payments over 5 years (Scott - $47,004; Peterson - $57,800) discounted at 8 percent
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MLI #2 – Sources of Financing for Jack Peterson
• Difference between market value and book value of plant:
• $200 K X 75% = $150K Loan collateral• Balance sheet debt capacity:
• 100% of cash + 75% of A/R, less current credit line, or
• $50K + $450K - $325 = $175K• Personal net worth: $650K• “Angels” or other private investors.
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MLI #3
• OPERATING RESULTS AFTER PARTNER BUYOUT 1999 2001 2003 2005Sales $5M $8M $10M $13MNet Income $180K $600K $700K $1M
All debt for the purchase was paid off in two years.