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)
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
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
Factors Affecting Finance Accomplishments and performance to date Investor’s perceived risk Industry and technology Venture upside potential and anticipated exit timing
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
Factors Affecting Finance Founders’ goals regarding growth, control, liquidity, and harvesting Relative bargaining positions Investor’s required terms and covenants
MLI #1 BUY/SELL BIDS Actual Bids ScottPeterson Cash$523,000$550,795 Non-competition agreement (PV)* 192, ,278 Adjusted purchase price$715,146$787,073 *Represents annual payments over 5 years (Scott - $47,004; Peterson - $57,800) discounted at 8 percent
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.
MLI #3 OPERATING RESULTS AFTER PARTNER BUYOUT Sales $5M$8M$10M$13M Net Income $180K $600K $700K $1M All debt for the purchase was paid off in two years.