Financing a Small Business - Modest Growth Figure 9.1 Pre-launch Start-up Growth Transition Bootstrapping Self, friends, and family Equity financing Debt financing

Financing a High-Growth, High-Potential Venture Figure 9.2 Pre-launch Start-up Growth Transition Bootstrapping Seed financing from angels Equity financing from VCs Debt financing

Most Common Sources of Financing Figure 10.1 Pre-launch Start-up Growth Transition Self, friends, and family

Advantages and Disadvantages of Self-Financing Table 10.1 Copyright 2009 Cornwall, Vang & Hartman Advantages Disadvantages Relative ease of securing funding May limit size and scope of start-up Avoid complexity created by adding partners May limit ability to grow Better alignment with entrepreneur’s aspirations Increases exposure to personal risk from business failure No dilution of profits or gains Entrepreneur may lack all necessary experience, contacts, skills, and/or knowledge Eventual exit process is often simpler

Bootstrapping Throughout the Life of a Venture Figure 11.1 Pre-launch Start-up Growth Transition Bootstrapping

Equity Financing Figure 12.1 Pre-launch Start-up Growth Transition Equity financing

Debt Financing Figure 13.1 Pre-launch Start-up Growth Transition Debt financing

Example of Assets and Potential Funding Generated Table 13.1 Copyright 2009 Cornwall, Vang & Hartman Asset Estimated value Percentage financed Potential funding generated Customer Purchase Orders $50,000 70% $35,000 Accts. Receivable (<60 days) $80,000 70% $56,000 Inventory $20,000 30% $ 6,000 Leasehold Improvements $10,000 50% $ 5,000 Building $120,000 70% $84,000 Undeveloped Land $40,000 40% $16,000 Equipment $15,000 80% $12,000 Total of Business Funding Sources $335,000 $214,000

Financing a High Growth Venture Figure 14.1 Pre-launch Start-up Growth Transition Venture capital equity financing

Initial Public Offering Advantages Disadvantages Diversification and liquidity Reporting costs Ability to raise new cash Disclosure of information Valuation Maintenance of control Future business deals Publicity

Exit Through Ownership Transfer Type of Exit Advantages Disadvantages Asset Sale Cash sale Immediate tax on full sale Clean break Lower face value sale price Earn-out possible Stock Sale Higher face value of sale price Potential volatility of stock from sale Tax deferment of sale price Restrictions on sale of stock

Exit Through Partial or Limited Transfer Type of Exit Advantages Disadvantages Merger Potential synergies Cultures may clash Tax deferment of sale price Limited opportunity for immediate cash IPO Taking some cash out possible Limits on sale of stock Can bring in professional management

Exit Through Partial or Limited Transfer (Continued) Type of Exit Advantages Disadvantages Strategic Alliance Reduces risk to existing value May be long time, if at all, to actual exit ESOP Can maintain business culture May be long time, if at all, to actual exit Family Business Transfer Can maintain business culture Challenges of generational succession

Exit Through Bankruptcy Type of Exit Advantages Disadvantages Bankruptcy Orderly end to business Ethical challenges Results in no realization of wealth from business Can hurt entrepreneur’s ability to fund future deals

Exit Through Liquidation Type of Exit Advantages Disadvantages Liquidation May result in more value, especially for service business No value for going concern Can be viewed as “failure”

Figure 14.4 Sale Process of a Business Initial Inquiry Letter of Intent Deal Price and Basic Structure Agreed Upon Purchase Agreement and Closing Due Diligence 10 % of deals proceed to next stage 50 % of deals proceed to next stage 50 % of deals proceed to next stage