Assignment attached due Friday Dec. 8,2017 by 10:00pm. I live in Texas. Thank you.

Application Assignment #6 – Lesson 8

LOOKING FOR CAPITAL

When Joyce and Phil Abrams opened their bookstore one year ago, they estimated it would take them six months to break even. Because they had gone into the venture with enough capital to keep them afloat for nine months, they were sure they would need no outside financing. However, sales have been slower than anticipated, and most of their funds now have been used to purchase inventory or meet monthly expenses. On the other hand, the store is doing better each month, and the Abramses are convinced they will be able to turn a profit within six months.

At present, Joyce and Phil want to secure additional financing. Specifically, they would like to raise $100,000 to expand their product line. The store currently focuses most heavily on how-to-do-it books and is developing a loyal customer following. However, this market is not large enough to carry the business. The Abramses feel that, if they expand into an additional market such as cookbooks, they can develop two market segments that—when combined— would prove profitable. Joyce is convinced that cookbooks are an important niche, and she has saved a number of clippings from national newspapers and magazines reporting that people who buy cookbooks tend to spend more money per month on these purchases than does the average book buyer. Additionally, customer loyalty among this group tends to be very high.

The Abramses own their entire inventory, which has a retail market value of $280,000. The merchandise cost them $140,000. They also have at a local bank a line of credit of $10,000, of which they have used $4,000. Most of their monthly expenses are covered out of the initial capital with which they started the business ($180,000 in all). However, they will be out of money in three months if they are not able to get additional funding.

The owners have considered investigating a number of sources. The two primary ones are a loan from their bank and a private stock offering to investors. They know nothing about how to raise money, and these are only general ideas they have been discussing with each other. However, they do have a meeting scheduled with their accountant, a friend, who they hope can advise them on how to raise more capital. For the moment, the Abramses are focusing on writing a business plan that spells out their short business history and objectives and explains how much money they would like to raise and where it would be invested. They hope to have the plan completed before the end of the week and take it with them to the accountant. The biggest problem they are having in writing the plan is that they are unsure of how to direct their presentation. Should they aim it at a banker or a venture capitalist? After their meeting with the accountant, they plan to refine the plan and direct it toward the appropriate source.

QUESTIONS

1. Would a commercial banker be willing to lend money to the Abramses? How much? On what do you base your answer?

2. Would this venture have any appeal for a venture capitalist? Why or why not?

3. If you were advising the Abramses, how would you recommend they seek additional capital? Provide your rationale for your recommendation.

THE $3 MILLION VENTURE

The Friendly Market is a large supermarket located in a city in the Southwest. “Friendly’s,” as it is popularly known, has more sales per square foot than any of its competitors because it lives up to its name. The personnel go out of their way to be friendly and helpful. If someone asks for a particular brand-name item and the store does not carry it, the product will be ordered. If enough customers want a particular product, it is added to the regular line. Additionally, the store provides free delivery of groceries for senior citizens, check-cashing privileges for its regular customers, and credit for those who have filled out the necessary application and have been accepted into the “Friendly Credit” group.

The owner, Charles Beavent, believes that his marketing-oriented approach can be successfully used in any area of the country. He therefore is thinking about expanding and opening two new stores, one in the northern part of the city and the other in a city located 50 miles east. Locations have been scouted, and a detailed business plan has been drawn up. However, Charles has not approached anyone about providing the necessary capital. He estimates he will need about $3 million to get both stores up and going. Any additional funding can come from the current operation, which throws off a cash flow of about $100,000 monthly.

Charles feels that two avenues are available to him: debt and equity. His local banker has told him the bank would be willing to look over any business plan he submits and would give him an answer within five working days. Charles is convinced he can get the bank to lend him $3 million. However, he does not like the idea of owing that much money. He believes he would be better off selling stock to raise the needed capital. Doing so would require him to give up some ownership, but this is more agreeable to him than the alternative.

The big question now is, How can the company raise $3 million through a stock offering? Charles intends to check into this over the next four weeks and make a decision within eight weeks. A number of customers have approached him during the past year and have asked him if he would consider making a private stock offering. Charles is convinced he can get many of his customers to buy into the venture, although he is not sure he can raise the full $3 million this way. The other approach he sees as feasible is to raise the funds through a venture capital company. This might be the best way to get such a large sum, but Charles wonders how difficult it would be to work with these people on a long-term basis. In any event, as he said to his wife yesterday, “If we’re going to expand, we have to start looking into how we can raise more capital. I think the first step is to identify the best source. Then we can focus on the specifics of the deal.”

QUESTIONS

1. What would be the benefits of raising the $3 million through a private placement? What would be the benefits of raising the money through a venture capitalist? What would be the

2. Of these two approaches, which would be best for Charles? Why?

3. What would you recommend Charles do now? Briefly outline a plan of action he can use to get the financing process started.