Entrepreneurial Finance EDS411

8/3/2019 Entrepreneurial Finance EDS411

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EDS 411

Babajide A. A. and Adetiloye K.A.



a) Someone who organizes a business venture andassumes the risk for it.

b) An entrepreneur is a person who has possession of anew enterprise, venture or idea and assumes

significant accountability for the inherent risks and theoutcome. The term is originally French and was firstdefined by the Irish economist, Richard Cantillon.

c) A person who is innovative and takes the risk of bringing the other factors of production together in a

business concern to try and profitably satisfy theneeds and wants of a particular segment of a market



1.The type of business to be invested in whichcould be :Process or Nature of business

◦ (a).Capital intensive business would require morefunds,

◦ (b).Labour intensive business would require lesscapital

2. Age of business: new versus old

3. Availability of Capital allowance and other

government incentives4.The type of Ownership involved



Planning is required since you would not beusing all you need at a time. The followingstages are recognised for capital needs forthe business

(a) Setting up of the business

(b) at take off

(c) Expansion periods

(d) When adding new lines(e)When consolidating business lines



The most obvious places are the financialinstitutions namely

a) Banks generally

b)

Development finance institutions in thebusiness line or area

c) Specialised agencies

d) SMEIES Fund

e) Venture Capital Fund (more on this later)f) Private entrepreneurs



The financial structure of a business is madeof either or both of:

Equity: The shareholders funds mainly of ordinary shares and contributions investedinto the business. It also comprises of retained earnings.

Debt: Normally borrowed from others inform

of debenture, bank term loan, trade creditand other forms of third party non equityfinance



Long term equity finance Investing as opposed to banks who lend

Looking for high gains

Accepting high risks Can be involved in management of the

invested firm

Venture capital investment is illiquid



Mostly funds◦ Charge about 2% + success fee

Also companies

Limited partnerships expected soon

Prevalence of banks◦ Revenue implications



No fixed expense of debt servicing Financial flexibility Sharing of risk Value added investing

◦ Attracting talent◦ Networking with service providers/suppliers◦ Accessing markets

Enhanced credibility with lenders



Dilution of shareholding Increased 3rd party governance

Increased controls

Increased commitment to stated strategy



Early stage financing Seed capital or pre-start up or R&D

Start up financing

Second round financingLater stage financing

Expansion

Replacement

Turnaround



1. Get rid of scamsters2. Hygiene factors – beware of things that can

shut down a business3. Growth & industry considerations4. Due diligence

1. Physical evaluation2. Calling in the experts

5. Monetise value



Amount and terms of investment. Dividend policy. Composition of the board of directors. Reporting - management reports, monthly

accounts, annual budgets. Liquidity (exit) plans. Rights of sale

Warranties. Matters requiring venture capitalist

approval



Locating players Concerns regarding exchange of info

Larger companies look equally attractive withlesser risk

Even listed securities are giving great returns



Placement agents (Venture Partners) Trade meetings

Syndication◦ Getting a larger team / new perspective

◦ Spreading risk



Banks

Corporations



Average fund size $50 mil Total deals per annum – 100+

Mostly expansion – few seed or early stage



Business plan Financial statement

Profile of promoter

Asset base◦ Gross

◦ Net

Credit scoring or credit rating (recently

introduced into the Nigerian financial system)



Collateral◦ Internal incl. a/c receivable

◦ External

Personal guarantees

Debt covenants

Short maturity debt



Complete paperwork in time Submit financial statements as scheduled

Route all transactions through bank

Ask for extras – free drafts, alerts, etc Exude confidence and well being

Transmit good news

Be proactive about inspections



Specifically for SMEs Joint initiative of:

Nigeria Banks



SME contacts SMEEIS Questionnaire is filled

Documents are submitted

Site visit by SMEEIS representative Rating is announced 15 days after all

documents are received



Below 1 7500 Upto 5 25000

Upto 20 37000

Above 20 50000



Can result form unplanned success Is usually due to lack of planning or tardiness

in collections Dissatisfaction among suppliers

◦ Higher costs◦ Lower quality

Dissatisfied (worried) employees High bad debts – migration of customers



Investigate new customers Supply against written orders Sign on a legal contract Maintain close contact with customers Get and repeat positive feedback Send invoice ASAP Contact before sending invoice ( to check

particulars)



Keep a close watch on customer’s fortunes Immediately contact on any delayed payment

Be firm – its your own money

Allow a customer to graduate in his creditratings with you



Identify fixed and variable costs Explore possibilities of changing fixed into

variable costs

And vice-versa

Can be expressed in terms of ◦ Capacity utilisation

◦ Sales revenue



Helps in taking investment decisions Profit optimisation planning

Helps in pricing decision

Can be modified to calculate profitability atvarious levels of capacity utilisation / sales



Discounted Cash Flow Approach

Value the firm and the equity in the firm using traditional discountedcash flow models.

From the value of the equity, subtract out the value of any non-common stock equity claims on the firm (such as warrants andoptions)

Divide the value of the equity by the total number of sharesoutstanding, including the shares that are retained by the existingowners of the firm

Relative Valuation Approach

Choose a group of comparable firms

Choose a multiple (preferably one that is widely used in the sector(Estimate a multiple for this firm based upon its characteristics,relative to the comparable firms

Entrepreneurial Finance EDS411

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