M1 - General Decision Making Framework Flashcards
5 Steps for Making Financing Decisions
1: Defining criteria: how long in the business, how much cash is being generated, how much revenue, how fast are revenues growing, and what’s the potential for growth?
2: Based on four previous cretic, define business development stage
3: look at financing alternatives based on market conditions, risk tolerance and control related issues
4: Evaluate the financing alternatives by estimating cost and fund availability
5: Mix the alternative options to develop a strategy that optimizes costs of funds, operating flexibility for a given level of risk
How long have they been in business?
- 90% of businesses don’t last 10 years
- Without a lot of assets, history is the only thing that can be based off of when making lending decision
How much FCF is being generated?
How is their solvency, liquidity, and value creation?
How much cash / net cash is generated from operations?
How much Revenue is generated?
- Knowing revenue gives the sense of size of business
- no revenue = no cash flow
What are the 6 development stages?
Development stage Startup Stage (first stage) Survival Stage (second stage) Rapid growth stage Early-mature stage Maturity stage
Development Stage
- Identify a business opportunity
- prototype
- presented to friends and family
- First draft of business plan
Start-up stage
- Start of venture operation (production and sales)
- Business plan presented to private equity investors (VC/Angels)
- Low to no revenue
- Revenue can’t cover business expenses yet
- expect above normal growth in future
Start-up financing
- Seed money
- Angels
- VC firms
Seed Financing (During development stage)
-financed from personal assets/ friends and family
Survival Stage
- Revenue starts to grow but still can’t cover expenses
- Need additional external finance
- No track record yet so can’t borrow
- Solvency and cash management are major issues*
Survival Stage Financing
- seed money
- crow funding
- angels
- VC
- Credit card
- suppliers (trade credit)
- customers
Rapid growth stage
- revenue grows rapidly (abnormal growth rate) and it can cover expenses
- Additional external financial resources are needed to finance investment in NOWC*
- Rapid growth in market shares
- Rapid value growth
Rapid growth financing
- All of the previous (seed, credit cards, VC, angels, family/friends,sales)
- VC can provide additional capital to financial NOWC
(2nd round financing)
- Banks
- Mezzaine Financing
- Bridge financing
Early-maturity stage
- revenues, CF from operations and firm value are growing at slower rate
- revenue growth rate close to or above pre-tax profit margin of business
- Can use additional bank loans, IPO, new stock issues, new bond issues
Mezzaine Financing
Debt that has an option to be covered into equity
Bridge financing
Short-term loan at the end of rapid growth stage (before IPO or Merger and Acquisition M&A)
Seasoned Financing
New securities (stocks or bonds) issued to the public
2 types of Mezzaine financing
1: interest + fixed percentage of firm annual FCF
2: interest payment + principal repayment at maturity or Warrants attached (where warrant can be exercised at maturity, instead of receiving principle they receive common shares) These warrants are known as sweeteners
