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.