Entrepreneurial Finance: Strategies for Growth/Exit Flashcards
What is the core concept of the risk/reward trade-off?
Grow the business one “rung” at a time, maximize that growth strategy and then move on to the next one (even if it doesn’t have the most reward) because it will give you the best chance long-term of success
What are the four intensive growth strategies?
- Market penetration
- Market development
- Alternative channels
- Product development
Describe market penetration and explain WHY it is the first step
Sell more of your current product to current customers BEFORE jumping to your next product because it doesn’t require new capital/new expenses
Describe market development
Sell your current product in new markets (this will have some more costs associated with it)
Describe alternative channels (give an example)
Pursuing customers through a different distribution channels (eg. opening an online store, starting a delivery service, selling products in physical stores, etc.). This will cost more, but there is not too much capital incurred
Describe product development
Develop new products to sell to existing customers as well as new ones: get new products into the hands of people who understand and like your products, but also try to get it into some new stores
Give an example of a company who used integrative growth strategies
- Polaris: was originally a company that made snowmobiles, but they realized that winters are always changing. They decided that they wouldn’t survive if they kept going the way they were going, so the introduced a new product: ATV’s: they could go in grass and mud instead of snow. This was much more fitting for the environment
What are the three integrative growth strategies?
- Horizontal integration
- Backward vertical integration
- Forward vertical integration
Describe horizontal integration
Acquiring/merging with a competitor. This creates growth because you have more products, more customers, and more facilities, as well as one less competitor. This is not cheap or easy: 75% of all acquisitions usually fail to deliver the value that they are promised
Give an example of a company that completed a horizontal integration
Tim’s and Burger King merged (Burger King bought Tim’s)
Describe backwards vertical integration
Acquiring/margining with a supplier. You would do this if you were trying to increase control over your supplies (prices, timing of production, quality of production). This can grow the company and be an important strategic decision if you are having difficulty with your suppliers
Give an example of a company that completed a backwards vertical integration
Virgin records: instead of just selling music, they integrated backwards and they got into music production and talent management. They did this because they wanted to earn more profit than just from selling their records (especially as trends were changing away from records)
Describe forwards vertical integration
Acquiring/merging with a distributor. You would do this if you think that you could be more profitable with your own distribution channel, or if you are not happy with the level of effort being put into selling your product by your retailers/seller. This could be done through acquisitions, merges, or by creating your own physical store. This strategy is a lot more expensive and complex than the other two options
What is diversification?
Acquiring/merging with a company that is completely unrelated to your business. This is not as strategic a decision in terms of competitors, suppliers, or distributors because it is not connected to the supply chain (it is purposely disconnected from the supply chain)
Give an example of a company that used the diversification strategy
GE (general electric) once only sold appliances, but now they have a nuclear division, a financial services division, and a railcar division
What are harvest/exit strategies?
The method that both entrepreneurs and investors use to use and reap the value of their investment
What are the personal considerations for entrepreneurs when they are thinking about leaving the company?
If they left the company, what would they be doing with their time, and how would it impact their personal lifestyle? Would it impact their personal finances?
What are the financial considerations for entrepreneurs when they are thinking about leaving the company?
Is the business set up to operate without them? Is it “saleable?” (i.e. there needs to be processes and systems set into place that allows the business to run without them)
What are the considerations for the investors when they are thinking about leaving the company?
** my notes are literally just from the slides - check with someone else
What does IPO stand for?
Initial Public Offering
Describe what an IPO is and when it makes sense
An IPO is the first time that a company issues public shares of their company. Very few companies get to a size where this makes sense. The whole point of an IPO is to raise capital and grow, so it should happen relatively low on the growth curve instead of at the end
What are the concerns about IPO’s?
Lock-up: IPO’s have a clause in the contract that says that the entrepreneurs cannot cash out until a certain deadline or date as passed - this prevents them from taking the money and then bailing on the company.
Cost: IPO’s and extremely costly and take a long time
Loss of secrecy and flexibility: you are going public, so you have no more secrets; you have to publish all of your financial information and make your decisions public
What are reverse mergers?
When a private company merges with a public company
Which is more common, IPOs or reverse mergers?
Reverse mergers
Give some examples of companies that have performed reverse mergers
Blockbuster, Burger King, Nyse, Jamba Juice, Texas Instruments
Describe reverse mergers
When a company goes public but the company is not as profitable as they expected, so they start to lose money and their business valuation goes down until a private company can afford it
What are the three exit strategies?
- Take the company public (IPO)
- Sell the company
- Release the firm’s free cash flows
What are the three forms of selling the company?
- Strategic acquisition
- Financial acquisition
- Employee acquisition
Describe the “strategic acquisition” strategy of selling the company
Getting purchased by a supplier/competitor/distributor. In effect, it’s any of the integrative growth strategies being done to your own company
Describe the “financial acquisition” strategy of selling the company
Being purchased purely for financial resources, rather than a competitive advantage in the industry (i.e. the diversified growth strategy being done to your own company). This is only done for good, strong, cash-positive companies. One form of this can happen through leverage buyout
What is leverage buyout (LBO)?
When you buy other companies with loans
What is a disadvantage of LBOs?
Now you have a lot of debt to service, as well as working to combine two companies and make them co-operative and profit earning quickly, while facing looming interest deadlines
Describe the “employee acquisition” strategy of selling the company
When you are ready to retire, and your employees are ready to step up and buy the business. Selling your company might be the way that you personally get your money out of it, but your employees may still stay on and help run the company
Describe the exit strategy of releasing the firm’s free cash flows
When the business is strong and generating free cash flow, and you’ve set aside money to reinvest in the business, then you can take that money out of the business for yourself, the investor, or to buy back some of the sold shares of the company
What is the caution for releasing the firm’s free cash flows?
Some businesses can get very aggressive with this. If you take too much cash flow out, and you let your machines/facilities/research wear out, then your business could move into the decline stage of the venture life cycle
What is the free cash flows formula?
Free cash flows = operating cash flow - capital expenditures
What can happen if owners stop reinvesting and start harvesting from their business?
They risk losing their competitive advantage over their competitors
