handout entrep finance epilogue march 2012

H a n d o u t f o r E n t r e p r e n e u r s h i p 1 0 1 P a g e | 265

EPILOGUE:

―After the entrepreneurial phase: what happens next?‖

Overview: You’ve spent years building your small business. You’ve taken no vacations. Work pressure forced you to miss family events. And you have succeeded. You now have a rhythm of regular sales for your company. You now have an ―engine of growth.‖ Now, you are tired, wondering what is next, and ready to reap the fruits of your labor. You wish to explore your options now. Time to ask yourself: Is the entrepreneurial experience satisfying, so far? If yes, then good. Keep going. If not, then the logical next step is to look for a way forward or a way out. Way forward: 1. You could drive your single-product company to expand to medium-sized status, or to the stature of a large multinational. You could go global. 2. You could expand sideways into other related industries, set up new lines of business, and become a diversified conglomerate. Be global and multi-product. But eventually, you might reach a peak. A peak implies a high point between two low points. One usually climbs up to a peak, and then goes downhill all the way afterwards. Do you relish the prospect of reaching a peak and then going downhill from there? Way out: Retirement is also an option. Remember that even great athletes retire. They may win the world championship five times in a row. Then they get out of the game. They quit while they’re at their peak. They give reasons like shifting priorities. They want to spend more time with the family. In the end, do whatever enriches your life. Think about the harvest. Be optimistic always, as you walk this road that branches out into alternative futures.

List of sections, to guide typesetter.

Target Higher Growth Paths to the Future: integration Paths to the Future: geographic expansion, diversification

Paths to the Future: organic growth, or acquisitions. Mergers and acquisitions. Harvesting

How to Value your Business


Learning Objectives

At the end of this session, the student should be able to:

1. Understand the concept of the engine of growth 2. Understand some advantages of remaining a small company 3. Reflect on noble goals for keeping a company running

4. Learn the meaning of horizontal integration 5. Learn the meaning of vertical integration. 6. Understand the benefits of forward integration

7. Understand the benefits of backward integration 8. Learn ways to achieve geographic expansion 9. Learn the meaning of diversification

10. Contrast organic growth vs growth via acquisitions 11. Appreciate the entrepreneur's motive for harvesting 12. Learn the meaning of exit strategy

13. Understand the need to calculate the value of the business

STORY FROM REAL LIFE AMERIGROUP Corporation grows from small to big—very quickly

Jeffrey McWaters, Chairman & CEO, of Amerigroup, saw a unique niche in the healthcare market. His vision was to operate a community-focused managed care company with an emphasis on the public sector healthcare market. He

wanted to develop a company whose services would ultimately result in better health for his fellow citizens.

A venture capital firm invested. Later on, AMERIGROUP did a successful IPO. The company remains profitable, currently exceeding $2 billion in sales with a market cap of $847 million, in year 2008.

The company is a multi-state managed healthcare company. Focused on serving

people who receive healthcare benefits through state-sponsored programs including Medicaid, Children's Health Insurance Program (CHIP) and Family Care, it is the largest private-sector corporation focused exclusively on this population's

healthcare needs. They serve more than 1 million members in nine states and the District of Columbia.

Introduction


If your young company is already running in a stable way, you have done a proper job. You now have an ―engine of growth‖ that keeps the revenues coming

in. There is a rhythm of regular sales for your company. An engine of growth means that your company has identified a stable way to operate and it now targets growth in sales and profits. It is way past the stage of fighting for

survival. Look now at further paths to growth.

Glossary Engine of growth: a stable source of revenues for

your company

Usually, an early-stage company is small in size, as defined by the level of sales and the number of employees. It is possible to define small business as having

less than $200 million in sales, or less than 100 employees. It is possible to define medium-scale enterprise as having $200 million to $1 billion in sales, and having between 101 and 1000 employees. A company of medium-scale, might

already have operations all over a certain federal state or province.

1. Target Higher Growth Let us assume that your company is already well known in the city where you started operations. You are thinking of the full potential that your company can

reach with your guidance.

There are coffee shops in every city that are happy where they are. They stay the same size for years. One day, Starbucks started in Seattle. From the beginning, Starbucks was thinking about going overseas. Now it sells coffee all over the world.

You have several options.

1. You could keep the company as it is. There are several benefits to owning

and managing a small company that does not grow bigger. The company can be easily managed with minimal effort. The company achieves high profit margins already on moderate sales.

The company has tried increasing sales, but somehow cost of goods

also rose and selling expenses also went up, thus the firm’s profit margins went down.


Members of the family are running the business. You see no need to

hire outsiders who cannot be trusted. Product unit sales should be kept low to maintain the premium image.

2. You could target greater growth and glory.

Let’s take option 2. Your paths to growth could be described in terms of a later stage of development, a greater size of company, or wider geographic reach.

Stage Size Geographic reach

Early Stage. Infancy. Small company City-wide

Middle Stage. Medium-sized company State-wide

Mature Stage. Large company Nation-wide

Note: A small company can remain small, yet its products are marketed nation-wide. A medium-sized company can remain medium-sized, while its products are sold globally.

Geographic Expansion: refers to the practice of expanding the

locations of your business, whether it be setting up more factories, more warehouses,

more stores, or branches, and offices.

Ask Yourself

Do I now know what I want out of this business?

Is my business at the right size and stage already?

Is my business going to maintain this steady state?

Is my business going to grow aggressively?

You may target further growth for noble goals. For example, you may want to

keep your current employees happily employed. You may want to create more employment to give benefits to society. You might want your company to lead campaigns to display environmental consciousness or build a better world.


In that case, you have larger ambitions. You want to keep working towards a bright future. So now, you want to think of ways and means to let the business

grow larger.

STORY FROM REAL LIFE

Career builder: a story of organic and rapid growth

Rob McGovern, Former Chairman & CEO, speaks about CareerBuilder, Inc. Since the origin of trade, employers and job seekers have sought each other out.

As the job market became more sophisticated, recruiters began to enter the picture. Since the 1920’s these three functions have formed the basis of the employment market.

Fast forward to 1995. Rob McGovern developed a business plan about a better way to match employers with jobseekers. Rob presented the business plan to

nearly 40 investors before he got funding. CareerBuilder eventually worked because it took an existing idea where a lot of money was already being spent and implemented it better via the Internet.

CareerBuilder became a sophisticated, interactive online job board. It grew to become the most highly trafficked job site on the Internet with over $140 million

in revenues, $20 million in operating profits, and 500 employees. A successful IPO in 1999 was quickly followed by an acquisition by Tribune Company & KnightRidder.com. To this day, CareerBuilder continues to thrive in a highly

competitive market – a true survivor and one of the few firms that prospered in the category.

Source: Nea.com

2. Paths To The Future: Integration

Integration: integration is the

process of acquiring management control over other companies, and making them part of your

overall company. One possible path to growth is for your small company to become a medium-

sized company, or a large company, by virtue of strong sales and profits within


the same line of business. Your operations could expand throughout the city or throughout a federal state (or province).

Horizontal integration. The company could practice horizontal integration, which is the practice of acquiring management control over other companies in

the same competitive space.

Horizontal

integration: the practice of acquiring management

control over other companies in the same competitive

space

If you run a photography shop and there are ten other photography shops in a city, you could try to ―buy out‖ your competitors. Raise some money and use it to buy out five other shops. Once you buy them, you could either (1) close them

down, and sell off their assets. (2) operate them as branches of your shop. Your integrated shop would then have much larger market share, and more branches

in the city, than ever before.

Glossary: Horizontal integration--the practice of acquiring management control over other companies

in the same competitive space

For example, an entrepreneur who goes into optical shops could also start selling eyeglasses and eyewear, which are related businesses. He could buy other optical shops. He could buy chains of optical shops. He would then gain access

to the customers of the acquired companies. He would take over fully functioning stores, staffed by well-trained opticians and optometrists. He may enjoy rapid growth. He will benefit from cost savings from shared warehouses, shared

accounting systems, and bulk purchasing to gain discounts. Vertical integration is the practice of acquiring management control over

companies that are your buyers, or suppliers. If you control the companies that supply your raw materials, and if you also control the companies that sell your

products wholesale, to other retail customers, you can lower costs and increase profits all throughout the process. By the way, the long ―chain‖ from raw materials to finished products to wholesale buyers to retail buyers, is sometimes

called the ―supply chain.‖ When is it good to practice vertical integration: when you can lower costs and increase profits all throughout the process, from production to sales.


Glossary: Vertical integration is the practice of acquiring management control over companies that

are your buyers, or suppliers

Glossary The supply chain is the long process of moving raw materials to finished products to

wholesale buyers to retail buyers.

Ask Yourself

Do I sometimes think that I can only go so far?

Do I sometimes think that I cannot improve any more?

Do I realize that I have limitations (which is true for all persons)? But inspite of that, do I exert efforts to overcome my limitations, so as to improve myself?

Running a business, meeting challenges, might be a way for me to keep pushing myself to achieve personal growth and improvement. Do I see it that way?

Forward integration

If your vertical integration is the type that buys up your sales conduits until you

reach your ultimate customer, that integration is called forward integration. When is it good to practice forward integration? Answer: when it improves your sales via greater volumes, or better pricing. Indirectly, it will improve your profits

& cash flows. Example of agribusiness company:

A small agribusiness company may buy fruits and vegetables from farms,

and sell them in groceries. If the agribusiness company decides to buy the grocery, then it is practicing forward integration.

If the agribusiness company decides to buy the farm, that supplies to it, then it is practicing backward integration.

Backward integration. Backward integration is the practice of owning or

controlling a company that serves as your supplier. When is it good to practice backward integration? Answer: when it improves your company’s production via lower costs or greater efficiencies. Indirectly, it will improve your profits & cash

flows.


Ask Yourself

If I am selling bread in a bakeshop, would I want to control the company that supplies the wheat flour?

If I am selling diamonds in a jewelry store, would I want to control the company that mines the diamonds?

3. Paths To The Future: Geographic Expansion and Diversification

Another way of thinking of your expansion is to look at a map or a globe. Go for expansion.

You could also ―look left and right‖ and expand into industries that are ―related‖ to your industry.

Geographic expansion refers to the practice of expanding the locations of your business, whether it be setting up more factories, more warehouses, more

stores, or branches, or offices. You could decide to either go nationwide or go

global.

Go nationwide. A path to growth which could really spur strong sales is the path of becoming a company with operations all over a certain federal

state or province. From there, the next step is to have operations in all states or provinces of the country. You remain in the same industry, but you expand mightily within it.

Go global. Target the huge export markets.

Diversification. To diversify means to engage in varied operations, to be present in more than one area, or to be involved in more than one activity. For a business to diversify, it needs to go into related industries. If necessary, set up a new line of business, or buy into an existing business.

―Diversification‖: To diversify means to engage in varied operations, to be present in more

than one area, or to be involved in more than one activity.

For example, the entrepreneur who is into optical shops …could start buying other types of shops. He could buy clothing stores. He could buy pastry shops. He would then gain access to the customers of the acquired companies. He

would take over fully-functioning stores, staffed by well-trained salespeople.


Most management experts would be astonished to see an optical shop, alongside a clothing store, or pastry shop, which usually have nothing to do with each

other. But if you are a good entrepreneur, you can make them all work, brilliantly. Silence the critics.

Ask Yourself

If I were an expert in manufacturing and selling furniture, would I want to diversify into clothing stores and pastry shops? Would I be able to make them into a successful conglomerate?

If I were an expert in manufacturing and selling furniture, what related lines of business should I go into?

4. Paths To The Future: Organic Growth Or Acquisitions

Acquisitions: the process of buying shares in other companies, or

acquiring majority control over other companies, so that your company becomes bigger. The

acquired company usually loses its name.

Organic growth. A company who depends every year on the same line of business is pursuing organic growth. The goal is to conquer more market

segments with variations of the product, or conquer new geographic areas with the same product.

Organic growth: Increasing the sales of the company, in the same line of

business.

Mergers and acquisitions. If the company believes that the prospects for that

same old line of business are getting low, then it could go out and acquire other companies in other lines of business that are experiencing dynamic growth. Acquisition is a fast way of achieving diversification.

Ask Yourself

If I were running a business that sells cars, would I want to buy the car manufacturing company? Would I buy just a few shares of stock in the car manufacturing company?


If I were running a business that sells cars, would I want to buy other companies that manufacture boats, airplanes, or trains?

5. Harvesting

Once your business is doing well and you wish to realize a good return on the effort invested, you have the option to retire. Assuming that you have worked

many years and you are ready to relax, then you could hatch a strategy to harvest the fruits of your labors and get some rest.

―Harvesting‖: collecting the fruits of your efforts and hard work; being able to enjoy the benefits

of your entrepreneurial ventures. Exit strategies. ―Exit strategy‖ means the planned disengagement from an

investment. The investor would want his money back and all his capital gains. Then he can decide if he would like to invest again.

Glossary “Exit strategy” means the planned disengagement

from an investment.

Several ways of exiting from an investment would be:

Take the company public by listing in the stock market and sell shares to

the public. This brings you some cash after a certain mandatory waiting

period.

Sell some shares to private-equity funds. Right after that, list the company in the stock market. Sell to the public half of the shares outstanding. Once you sell your shares, you raise cash.

Sell the company to a private buyer. This brings you cash.

One question that needs to be settled when initially selling shares of stock, or selling 100% of the company, is: What is the value of the company?


6. How To Value Your Business

Once your business is recognized to be successful and investors are interested to buy some shares of stock, the time has come to think of the value of your business. Someone wants to buy, for example, 20 percent of your company. He

will ask you how much it is. The average businessman would have a vague idea. To make the valuation more precise, turn to an expert in business valuation. He

can do the calculations. What he would do is estimate the cash flows, both present and projected. He

performs some calculations and comes up with a ―fair value‖ for your company. You can then use that ―fair value‖ for negotiating with the interested buyer.

Reference Guides

Magazines and Newsletters

Private Equity International Magazine Entrepreneur Magazine Fast Company Magazine

Home Business Magazine Inc Magazine (for entrepreneurs) Home Business Magazine

Strategy + Business Magazine

Ask Yourself Let us say, you have a business that generates one million euros per year of cash inflow. In ten years, your business would bring in ten million euros in cash. If someone says, he wants to buy my business today for eight million euros, would I sell it today at that price? IF yes, then you have a transaction. If not, then what price would you quote?

Conclusion Once your company is on a stable growth path, you face two big choices:

1. You could drive your single-product company to expand to medium-sized status, or to the stature of a large multinational.

2. You could also seek a way out. You could sell the business and retire.

Do, whatever enriches your life. It is good, to have options.


Glossary

Acquisitions: the process of buying shares in other companies, or acquiring majority control over other companies, so that your company becomes bigger.

The acquired company usually loses its name. Diversification: To diversify means to engage in varied operations, to be present

in more than one area, or to be involved in more than one activity.

Engine of growth: a stable source of revenues for your company. Exit strategy: means the planned disengagement from an investment.

Geographic Expansion: refers to the practice of expanding the locations of your business, whether it be setting up more factories, more warehouses, more

stores, or branches, and offices. Harvesting: collecting the fruits of your efforts and hard work; being able to

enjoy the benefits of your entrepreneurial ventures. Horizontal integration: the practice of acquiring management control over other

companies in the same competitive space Integration: integration is the process of acquiring management control over

other companies, and making them part of your overall company. Mergers: the process of putting one company together with another company to

form a larger company. The larger company may have a name that is different from the two companies that merged.

Organic Growth: the growth of your company's sales and profits, without counting newly-acquired companies or assets.

Supply Chain is the long process of moving raw materials to finished products ...to wholesale buyers ...on to retail buyers.

Value the business: to estimate the potential selling price for a company.

Vertical integration: is the practice of acquiring management control over companies that are your buyers, or suppliers


Points To Remember

1. An ―engine of growth‖ is a rhythm of regular sales for your company. 2. There are benefits for a small company that stays small:

The company can be easily managed with minimal effort.

The company achieves high profit margins already on moderate

sales. The company has tried increasing sales, but somehow also got

increased cost of goods, plus higher selling expenses, thus lower profit margins. Members of the family are running the business; you see no need

to hire outsiders who cannot be trusted. Product unit sales should be kept low to maintain the premium image.

3. Noble goals: to keep current employees happily employed. To create more employment, to give benefits to society, to build a better world.

4. Horizontal integration: the practice of acquiring management control over other companies in the same competitive space.

5. Vertical integration: is the practice of acquiring management control over companies that are your buyers, or suppliers.

6. Forward integration: you acquire more control over sales outlets.

7. Backward integration: you acquire more control over suppliers.

8. Geographic expansion: Go nationwide, or go global.

9. Diversification: means to engage in varied operations, to be present in

more than one area, or to be involved in more than one activity.

10. Organic growth: expanding within the same line of business

11. Acquisitions: buying other companies. A fast way of achieving corporate growth, whether in the same line of business of in different lines. Different lines of business means, diversification.

12. Entrepreneur's motive for harvesting: to reap the fruits of labors; perhaps

also, to rest and retire.

13. Exit strategy: the planned disengagement from an investment.

14. Value of the business: Investors may be interested to buy some shares of stock in your company. You need to know what is 'fair value" so that you


can negotiate with the interested buyers. A business valuation expert can calculate for you the ―fair value.‖

Learning From The Internet Learn more about the benefits of vertical integration:

http://www.quickmba.com/strategy/vertical-integration http://www.12manage.com/methods_vertical_integration.html http://en.wikipedia.org/wiki/Vertical_integration

http://web.streetauthority.com/terms/v/vertical-integration.asp

http://www.accuval.net/ -- AccuVal is a private company that claims to provide valuation and advisory solutions that allow companies to make strategic business decisions (decisions to buy other companies).

http://www.morebusiness.com/running_your_business/management/ah-exit-

strategy.brc -- Exit Strategy Planning: Business Plan Exit Strategy Tips http://www.quistvaluation.com/ -- Quist Valuation is a private company that

claims to deliver accurate, unbiased analysis to the venture, public and private companies since 1984.

http://www.dinkytown.net/java/BusinessValuation.html -- Business valuation

is typically based on three major methods: the income approach, the cost approach and the market (comparable sales) approach. Among the income approaches is the discounted cash flow methodology – calculating the net

present value ("NPV") of future cash flows for an enterprise. As an alternative to the more abbreviated income capitalization approach, this methodology is more relevant where future operating conditions and cash flows are variable

– or not projected to be materially consistent with current performance levels.

http://www.businesslink.gov.uk/bdotg/action/detail?type=CASE+STUDIES&site=181&itemId=1075378170 -- When you're setting up your business it's essential to think about how you'll ultimately end your involvement with it.

Review Questions 1. What is the ―engine of growth‖ 2. What are some advantages of remaining a small company

3. What are some noble goals for keeping a company running 4. What is the meaning of horizontal integration 5. What is the meaning of vertical integration.

6. What are the benefits of forward integration

http://www.quickmba.com/strategy/vertical-integration

http://www.12manage.com/methods_vertical_integration.html

http://en.wikipedia.org/wiki/Vertical_integration

http://web.streetauthority.com/terms/v/vertical-integration.asp

http://www.accuval.net/

http://www.morebusiness.com/running_your_business/management/ah-exit-strategy.brc

http://www.morebusiness.com/running_your_business/management/ah-exit-strategy.brc

http://www.quistvaluation.com/

http://www.dinkytown.net/java/BusinessValuation.html

http://www.businesslink.gov.uk/bdotg/action/detail?type=CASE+STUDIES&site=181&itemId=1075378170

http://www.businesslink.gov.uk/bdotg/action/detail?type=CASE+STUDIES&site=181&itemId=1075378170


7. What are the benefits of backward integration 8. What are some ways to achieve geographic expansion.

9. What is the meaning of diversification 10. Contrast organic growth vs growth via acquisitions. 11. What is the entrepreneur's motive for harvesting.

12. What is the meaning of exit strategy. 13. Why is there a need to calculate the value of the business.

Questions For Discussion 1. What would you prefer: to take your business international, specializing in

one product? Or to expand into many products, but saturating that national

market. 2. Do you have more confidence in the power of the local economy, or in the

export market?

3. Why would anyone want to retire after being successful for years and years?

Case Study Simon Dunn set up the Product Chain Company in London in 1988 to serve as a manufacturers' agent that builds brands for fast-moving consumer goods, and

then sells the products on to retail clients. He's now designing an exit strategy. He plans to sell the business to members of his team.

He says, "I'm 52 now and want to exit by the time I'm 57. I've looked at all the options. Selling the firm to senior managers seems to be the best choice.

―Selling the company to a larger firm may not work as we're doing something too specialized.

―I thought about bringing in family members, but I'm not that keen on it, and neither are they.

"I also looked at floating the company on the Alternative Investment Market (AIM) in London. The AIM is a market for smaller companies to issue and trade shares on the London Stock Exchange. It would cost around £300,000. That cash

is much better retained on our balance sheet."

"Our sales director, Charles Foden, has been with the business for 12 years. He's highly professional. I believe he should inherit the benefits of what we've all done together to drive the business forward. He already owns 10 per cent of the


business. I’m training him to start looking at things from the perspective of a business owner, not just as a manager or employee.

"We're looking at where we expect the business to be in five years' time. We’re looking at the kind of people we want to bring in, and what we want them to

achieve. When the day comes, Charles may invite staff members, to buy into the business too."

Source: http://www.businesslink.gov.uk

Case Analysis

1. What were the options that Mr. Simon considered? Why did he reject three options?

2. What is the cost and benefit of floating a company on a stock exchange?

3. The sales director has been with the business for twelve years. Is he a good candidate to take over the business? Why or why not. Cite facts from the case.


EXERCISES FOR

EPILOGUE:



Essay Question

Imagine that you have a footwear company, and that you have invented lightweight waterproof shoes for active outdoor sports and adventure. After

proving yourself in the demanding market in the United States, you are now ready to sell your shoes to the rest of the world.

The plan would involve constructing low-cost factories in countries with low-cost labor, at acceptable quality. You would need a network of warehouses and


delivery system, also known as ―logistics.‖ You have to get in touch with dealers in the target country who would take care of selling, supplying, and re-stocking

individual department stores, on a daily basis. You will build your brand through advertising to make the consumers trust the brand, and they will look for your products in their favorite stores.

Are you excited with the prospect, or overwhelmed with the things that you need to do? Why? Do you feel like you’re up to the challenge or are you the type that

would rather take things slow or give it up for others? Look inside yourself and write down your feelings.

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Answer these questions in the space provided

1. What is the ―engine of growth?‖

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 2. What are some advantages of remaining a small company? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 3. What are some noble goals for keeping a company running? _________________________________________________________________


_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 4. What is the meaning of horizontal integration?

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 5. What is the meaning of vertical integration? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 6. What are the benefits of forward integration? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

7. What are the benefits of backward integration? _________________________________________________________________


_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 8. What are some ways to achieve geographic expansion?

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 9. What is the meaning of diversification? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 10. Contrast organic growth vs growth via acquisitions? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

11. What is the entrepreneur's motive for harvesting?


________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

12. What is the meaning of exit strategy? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 13. Why is there a need to calculate the value of the business?

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Creative Visualization

Make a class prophecy. Imagine the entire class 20 years from now. You have decided to come together for a reunion. Who are in what kind of business?

Visualize everyone’s appearance, manner of dress and speaking, and personal growth. Be as creative, as you can be. ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


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Instructor’s Manual

EPILOGUE:



Learning Objectives

At the end of this session, the student should be able to:

1. Understand the concept of the engine of growth 2. Understand some advantages of remaining a small company 3. Reflect on noble goals for keeping a company running

4. Learn the meaning of horizontal integration


5. Learn the meaning of vertical integration. 6. Understand the benefits of forward integration

7. Understand the benefits of backward integration 8. Learn ways to achieve geographic expansion 9. Learn the meaning of diversification

10. Contrast organic growth vs growth via acquisitions 11. Appreciate the entrepreneur's motive for harvesting 12. Learn the meaning of exit strategy

13. Understand the need to calculate the value of the business

Oral Recitation Guide

1. What is the ―engine of growth‖ Suggested Answer: If your young company is already running in a stable way,

you have done a proper job. You now have an ―engine of growth‖ that keeps the revenues coming in. There is a rhythm of regular sales for your company. An engine of growth, means that your company has identified a stable way to

operate and it now target growth in sales and profits. It is way past the stage of fighting for survival. Look now at further paths to growth.

2. What are some advantages of remaining a small company Suggested Answer: You could keep the company as it is. This is the right size.

You have reached full potential. You want to keep it this way. There are several benefits to owning and managing a small company that does not grow bigger. • The company can be easily managed, with minimal effort.

• The company achieves high profit margins already on moderate sales. • The company has tried increasing sales, but somehow also got increased

cost of goods, plus higher selling expenses, thus lower profit margins. • Members of the family are running the business; you see no need to hire outsiders who cannot be trusted.

• Product unit sales should be kept low, in order to maintain the premium image.

3. What are some noble goals for keeping a company running? Suggested Answer: You may want to keep your current employees happily

employed. You may want to create more employment, to give benefits to society. You might want your company to lead campaigns to display environmental consciousness, or build a better world.

4. What is the meaning of horizontal integration


Suggested Answer: Horizontal integration. The company could practice horizontal integration, which is the practice of acquiring management control

over other companies in the same competitive space. If you run a photography shop, and there are ten other photography shops in a city, you could try to ―buy out‖ your competitors. Raise some money, use it to buy out five other shops.

Once you buy them, you could either (1) Close them down, and sell off their assets. (2) Operate them, as branches of your shop. Your integrated shop would then have much larger market share, and more branches in the city, than ever

before.

5. What is the meaning of vertical integration. Suggested Answer: Vertical integration, is the practice of acquiring

management control over companies that are your buyers, or suppliers. If you control the companies that supply your raw materials, and if you also control the companies that sell your products wholesales to other retail customers, you will

have better chances to make profits all throughout the process. The long ―chain‖ from raw materials to finished products …to wholesale buyers …to retail buyers, is sometimes called the ―supply chain.‖

6. What are the benefits of forward integration

Suggested Answer: An agribusiness company buys fruits and vegetables from farms and sells them in groceries. If the agribusiness company decides to buy the grocery, then it is practicing forward integration. Upon owning the grocery, it

has more control over sales.

7. What are the benefits of backward integration

Suggested Answer: If the agribusiness company decides to buy the farm, that

supplies to it, then it is practicing backward integration. Upon owning the farm, it has more control over supply.

8. What are some ways to achieve geographic expansion. Suggested Answer: Go nationwide. A path to growth, which could really spur

strong sales, is the path of becoming a company with operations all over a certain federal state or province. From there, the next step is to have operations in all states or provinces of the country. You remain in the same industry, but

you expand mightily within it.

9. What is the meaning of diversification


Suggested Answer: To diversify means to engage in varied operations, to be present in more than one area, or to be involved in more than one activity. For

a business to diversity, it needs to go into related industries. If necessary, set up a new line of business, or buy into an existing business.

10. Contrast organic growth vs growth via acquisitions.

Suggested Answer: A company whose growth depends every year on the same line of business is pursuing organic growth. The goal is to conquer more

market segments with variations of the product, or conquer new geographic areas.

If the company believes that the prospects for that same old line of business are getting low, then it could go out and acquire companies in other lines of business, that are experiencing dynamic growth. Acquisition is a fast way of

achieving diversification, and harnessing growth stars.

11. What is the entrepreneur's motive for harvesting. Suggested Answer: Once your business is doing well, and you wish to realize a

good return on the effort invested, you have the option to retire. Assuming that you have worked many years and you are ready to relax, then you could hatch a strategy to harvest the fruits of your labors, and get some rest.

12. What is the meaning of exit strategy.

Suggested Answer: ―Exit strategy‖ means the planned disengagement from an investment. The investor would want his money back and all his capital gains.

Then he can decide if he would like to invest again.

13. Why is there a need to calculate the value of the business.

Suggested Answer: Once your business is recognized to be successful and investors are interested to buy some shares of stock, the time has come to think

of the value of your business. Someone wants to buy, for example, 20% of your company. He will ask you, how much is it. The average businessman would have a vague idea. To make the valuation more precise, turn to an expert in business

valuation. He can do the calculations. What he would do is estimate the cash flows, present and projected. He

performs some calculations and comes up with a ―fair value‖ for your company. You can then use that ―fair value‖ for negotiating with the interested buyer


Creative Visualization

The class should make a class prophecy. In the prophecy, the students can be

asked to imagine the entire class 20 years from now. They imagine that they are coming together for a reunion. Who are in what kind of business? They were asked to visualize everyone’s appearance, manner of dress and speaking, and

personal growth. They should be as creative as they can. Ask two or three of the students to present their homework in class.

End.

handout entrep finance epilogue march 2012

Economy & Finance