ENTREPRENEURIAL FINANCE This Page Intentionally Left Blank ENTREPRENEURIAL FINANCE Finance and Business Strategies for the Serious Entrepreneur
Total Page：16
File Type：pdf, Size：1020Kb
ENTREPRENEURIAL FINANCE This page intentionally left blank ENTREPRENEURIAL FINANCE Finance and Business Strategies for the Serious Entrepreneur Second Edition STEVEN ROGERS Gordon and Llura Gund Family Professor of Entrepreneurship Director, Larry and Carol Levy Institute for Entrepreneurial Practice J.L. Kellogg School of Management, Northwestern University WITH ROZA MAKONNEN New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2009, 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permit- ted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ISBN: 978-0-07-159127-0 MHID: 0-07-159127-3 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-159126-3, MHID: 0-07-159126-5. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. To contact a representative please visit the Contact Us page at www.mhprofessional.com. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. ——From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUAR- ANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMA- TION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. CONTENTS Preface xi Chapter 1 The Entrepreneurial Spectrum 1 Introduction 1 Entrepreneurial Finance 2 Types of Entrepreneurs 3 The Entrepreneurial Spectrum 5 Chapter 2 The Entrepreneur 17 Introduction 17 Success Rates of Entrepreneurs 17 Why Become an Entrepreneur? 24 Traits of an Entrepreneur 35 Impact on the Economy 45 Impact on Gender and Race 48 Chapter 3 The Business Plan 55 Introduction 55 The Dual-Purpose Document 56 Business Plan Development and Advice 57 The Business Plan 58 Development of Pro Formas 71 Checklist of Financial Information 74 v vi Contents Most Important Business Plan Sections 75 Business Plan Development Sources 76 After the Business Plan Is Written 78 Chapter 4 Financial Statements 81 Introduction 81 The Income Statement 82 The Balance Sheet 92 The Statement of Cash Flows 97 Chapter 5 Financial Statement Analysis 103 Introduction 103 The Proactive Analysis 103 Income Statement Analysis 107 Ratio Analysis 108 Breakeven Analysis 116 Measuring Growth 117 Case Study—Clark Company 121 Gross Margins 131 Net Margins 139 Other Issues to Consider 143 Chapter 6 Cash Flow Management 149 Introduction 149 Types of Cash Flow 149 Cash Flow Forecasts 153 Cash Flow Management 155 Accounts Receivable 158 Accounts Payable 168 The Cash Gap 170 Working Capital 174 Finding Cash 175 Contents vii Chapter 7 Valuation 179 Introduction 179 Valuing the Clark Company 182 Premoney and Postmoney Valuations 183 Why Value Your Company? 185 Key Factors Influencing Valuation 187 Valuation Methods 203 Multiples 203 Multiples of Gross Margin 210 Different Industries Use Different Multiple Benchmarks 210 Asset Valuation 214 Capitalization of Cash Flows 214 Valuing Technology and Internet Companies 220 Chapter 8 Raising Capital 229 Introduction 229 Value-Added Investors 231 Sources of Capital 232 The Investment Is in the Entrepreneur 233 Chapter 9 Debt Financing 237 Introduction 237 Types of Debt 238 Sources of Debt Financing 239 Creative Ways to Structure Long-Term Debt 262 Long-Term Debt Rules to Live By 263 Debt Financing for Working Capital 264 Chapter 10 Equity Financing 275 Introduction 275 viii Contents Sources of Equity Capital 276 Private Placements 281 Corporate Venture Capital 284 Private Equity Firms 285 International Private Equity 291 Advice for Raising Private Equity 292 Increasing Specialization of Private Equity Firms 293 Identifying Private Equity Firms 294 Small-Business Investment Companies 295 Initial Public Offerings 297 Public Equity Markets 300 The IPO Process 304 The Financing Spectrum 309 Direct Public Offerings 310 Chapter 11 Financing for Minorities and Women 315 Introduction 315 Minorities—Debt Financing 318 Minorities—Equity Financing 319 Women—Debt Financing 321 Women—Equity Financing 322 Chapter 12 Taking a Job with an Entrepreneurial Firm 327 Introduction 327 Case Study: Considering a Job Offer from an Early-Stage Company 328 Case Study Analysis 338 Chapter 13 Intrapraneurship: Corporate Entrepreneurship 345 The Intrapreneurship Spectrum 346 Contents ix Intrapreneurship Models 348 Traits of the High-Growth Intrapreneur 349 Acts of Intrapreneurship 350 Signs of Intrapreneurial Success 352 Standard Operating Procedures 353 Intrapreneurship Blunder 354 Conclusion 357 Appendices 359 Appendix A: Industry Profitability 359 Appendix B: U.S. Funds Focused on Minority Markets 367 Index 373 This page intentionally left blank Preface It is morning at Opryland in Nashville, Tennessee, a place where young crooners from Charlie Pride and Johnny Cash to Garth Brooks and the Dixie Chicks have realized their dreams. Not far away is the Grand Ole Opry—country music’s equivalent of the Broadway stage—and a full day of work is about to begin. But this morning, the visitors have business, not music, on their minds. This is a conference for future entrepreneurs from around the country. Their schedules are packed with seminars on financing, marketing, and operations. Here is a sample: “Business Start-Up Essentials,” “How to Find Money-Making Ideas,” and “Designing Products.” Of course, none of this would be particularly noteworthy except when you consider that these conventioneers are aged seven to ten—and they are not the youngest group here. There is another set of entrepreneur seminars for kids aged four to six. It’s called the “Kidpreneurs Konference,” sponsored by Black Enterprise magazine and Wendy’s, and this sixth annual event is a sellout. Nearby, the kids’ parents, all entrepreneurs or future entrepreneurs themselves, are packed into their own seminars. If there ever was a doubt that this is the glory age of the entrepreneur, a few days with these “titans of tomorrow” should put that notion to bed. I write this book, this story of opportunities, because I have been blessed with so many of my own. It’s said that a good entre- preneur always sees sun in the clouds and a glass half full. My wife, xi xii Preface Michele, and my daughters, Akilah and Ariel, laugh at me when I tell them that I have gone through life always believing that when I walk through a door, the light will shine on me, no matter who else is in the room. Like every good entrepreneur, I believe in myself, but I also have enough humility to know that one does not go from the welfare rolls on Chicago’s South Side to owning three successful companies, sitting on the boards of several Fortune 500 companies [S. C. Johnson & Son (formerly S. C. Johnson Wax), SuperValu, AMCORE Financial, and Harris Associates, a $60 billion mutual fund], and teaching at the finest business school in America without a healthy supply of luck—and a handful of caring people. The first entrepreneur I ever met was a woman named Ollie Mae Rogers—the oldest daughter in a family of 10 kids, and the only one among them who never graduated from high school, let alone college.