EDS 411

Babajide A. A. and Adetiloye K.A.

a)
b)

c)

Someone who organizes a business venture and assumes the risk for it. An entrepreneur is a person who has possession of a new enterprise, venture or idea and assumes significant accountability for the inherent risks and the outcome. The term is originally French and was first defined by the Irish economist, Richard Cantillon. 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 the needs and wants of a particular segment of a market

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

(a).Capital intensive business would require more funds, (b).Labour intensive business would require less capital

2. Age of business: new versus old 3. Availability of Capital allowance and other government incentives 4.The type of Ownership involved

Planning is required since you would not be using all you need at a time. The following stages are recognised for capital needs for the 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 financial institutions namely a) Banks generally b) Development finance institutions in the business 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 made of either or both of: Equity: The shareholders funds mainly of ordinary shares and contributions invested into the business. It also comprises of retained earnings. Debt: Normally borrowed from others inform of debenture, bank term loan, trade credit and other forms of third party non equity finance

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

Enhanced credibility with lenders

Attracting talent Networking with service providers/suppliers Accessing markets

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 financing Later stage financing Expansion Replacement Turnaround

1.
2. 3. 4.

1. Physical evaluation 2. Calling in the experts

5.

Get rid of scamsters Hygiene factors beware of things that can shut down a business Growth & industry considerations Due diligence 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 with lesser 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 Upto 5 Upto 20 Above 20

7500 25000 37000 50000

Can result form unplanned success Is usually due to lack of planning or tardiness in collections Dissatisfaction among suppliers
Dissatisfied (worried) employees High bad debts migration of customers
Higher costs Lower quality

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 customers fortunes Immediately contact on any delayed payment Be firm its your own money Allow a customer to graduate in his credit ratings 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 at various levels of capacity utilisation / sales

Discounted Cash Flow Approach

Value the firm and the equity in the firm using traditional discounted cash flow models. From the value of the equity, subtract out the value of any noncommon stock equity claims on the firm (such as warrants and options) Divide the value of the equity by the total number of shares outstanding, including the shares that are retained by the existing owners 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