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1This project is co-funded by theEuropean Union and the Government of Jamaica
EQUITY financing for your business
TRAINING ROOMJAMAICA TRADE & INVEST
THURSDAY, AUGUST 20, 2009
CORPORATE FINANCE BROKER UNIT
2This project is co-funded by theEuropean Union and the Government of Jamaica
Objective
• The objective of this presentation is to provide useful information that will empower participants to make the right decisions when seeking equity financing for business ventures.
3This project is co-funded by theEuropean Union and the Government of Jamaica
Business Expenses
• Licenses / Permits
• Payment for professional services e.g.- legal, accounting, insurance
• Leasehold improvements
• Purchase of furniture, fixtures and equipment
• Stationery / Office supplies
• Wages
• Inventory
4This project is co-funded by theEuropean Union and the Government of Jamaica
Equity Financing• Equity funds come from the personal
moneys of partners ( e.g. savings, investment, inheritance, friends, family and business associates), and from stockholders.
• They are normally unsecured loans and have no registered claim on any assets of the business, freeing those ( i. e. the assets ) to be used as collateral security.
5This project is co-funded by theEuropean Union and the Government of Jamaica
Equity Financing
• Equity has a direct impact on the ability of firms to attract loans and or capital. Firms that borrow heavily compared to their equity position are considered to be highly leveraged. Simply put their activities are funded more by borrowed funds than from owners fund.
• A fully leveraged business ( i.e. 100 % )has no further ability to borrow funds. The firm is already owned by its debtors.
6This project is co-funded by theEuropean Union and the Government of Jamaica
How much equity should I have in my business ?
- Ideally 25% to 40% indicates to a lender that you are committed to your project and prepared to share the risk.
- As the business grows the owners should try to keep their equity at approximately 25%.
- Earnings retained in the business will increase your equity position.
Equity Financing
7This project is co-funded by theEuropean Union and the Government of Jamaica
Sources of Equity Financing
• Family, Friends, Inheritance and Personal Mortgages
If you decide to go this route consider doing so on a straight business basis.
Present them with a well thought out business plan- this will give them a sense of faith in your business and abilities to manage.
• Equity Partners Identify persons who not only have the money but
are knowledgeable about the industry itself, connected, and have expertise in areas of the business you do not.
8This project is co-funded by theEuropean Union and the Government of Jamaica
Sources of Equity Financing
• Investors Look first within the industry- Investors prefer
businesses they understand Passive investors- look for professionals who
have a steady income and their own responsibilities so that they have little time to interfere in your business.
•Public Listing on Stock Exchange
- Broad based ownership from many shareholders
9This project is co-funded by theEuropean Union and the Government of Jamaica
Sources of Equity Financing Cont’d
Approaching Equity Investors
Accept the fact that a partner will expect to be involved in the decision- making process.
At the very least they expect to be kept regularly updated on your activities.
Angel Investors- An angel investor (known as a "business angel" in Europe, or simply an "angel") is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity. Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund
10This project is co-funded by theEuropean Union and the Government of Jamaica
Sources of Equity Financing Cont’d
• Business Plan EvaluationPersons investing in your company should
be presented with a sophisticated and detailed business plan.
The prospective investor should rigourously evaluate all aspects of the plan
Business Plans should include information on management, products, production methods, operations and cost, markets, summary of liabilities, shareholding and financial projections.
11This project is co-funded by theEuropean Union and the Government of Jamaica
Shareholder Loans as Equity
• Shareholders Loans represent equity paid into a private company by relatively few “partners in profit and risk” in exchange for share ownership.
• The shareholder loan may be secured by share certificates.
12This project is co-funded by theEuropean Union and the Government of Jamaica
Sources of Equity Financing Cont’d
• Equity In Real Estate
Under utilized equity can be used to secure additional funding
13This project is co-funded by theEuropean Union and the Government of Jamaica
RISK MANAGEMENTRISK MANAGEMENT
Involves:
• Identifying
• Analyzing
• Reducing OR
• Eliminating
The exposure to loss faced by an Organization or Individual.
14This project is co-funded by theEuropean Union and the Government of Jamaica
RISK MANAGEMENTRISK MANAGEMENT
RISK MANAGEMENTRISK MANAGEMENT cont’d
• Identification: Risks are about events that, when triggered, cause problems. Start with the source of the problem, or the problem itself.
• Assessment. Once identified , they must be assessed as to their potential severity of loss and recurrence
• Potential risk treatments• Avoidance – eliminate• Reduction – mitigate• Transfer – outsource• Retention- accept and budget
15This project is co-funded by theEuropean Union and the Government of Jamaica
RISK MANAGEMENTRISK MANAGEMENT
• RISK MANAGEMENTRISK MANAGEMENT cont’d• CATEGORIES
• Internal Fraud: Misappropriation of Assets; Bribery
• External Fraud : Theft of information; Forgery
• Employment Practices and Workplace Safety: Employee health and safety; Background checks
• Clients, Products and Business Practices: Product defects, Market manipulation
16This project is co-funded by theEuropean Union and the Government of Jamaica
RISK MANAGEMENTRISK MANAGEMENT
• RISK MANAGEMENTRISK MANAGEMENT cont’d• CATEGORIES cont’d
• Damage to Physical Assets: Natural disasters; vandalism
• Business Disruption & Systems Failures: Utility disruptions; Software failures; Hardware failures
• Execution, Delivery & Process Management: Data entry errors, Accounting errors, Loss of clients assets, Failed mandatory reporting
17This project is co-funded by theEuropean Union and the Government of Jamaica
REINVESTING IN YOUR BUSINESS
• WHY REINVEST ?
• RELOCATION• EXPANDING BRANCH NETWORK• ACQUIRING NEW MACHINERY• MARKETING• DEVELOPMENT OF NEW PRODUCTS
18This project is co-funded by theEuropean Union and the Government of Jamaica
REINVESTING IN YOUR BUSINESS
• A Company’s first three years are considered to be the slowest.
BUT
• The gap between the present and your vision for the Company’s future can be narrowed if you reinvest your profits
19This project is co-funded by theEuropean Union and the Government of Jamaica
REINVESTING IN YOUR BUSINESS
• Businesses die because of lack of appropriate funds to grow
• Do not splurge profits on conspicuous and financially demanding lifestyles
• Focus on the value of your expenditure that will improve your business
• Do not invest in things that have no long term value
20This project is co-funded by theEuropean Union and the Government of Jamaica
REINVESTING IN YOUR BUSINESS
• If possible, open a new bank account for profits alone.
• This money should be used exclusively to explore methods to grow the company - e.g. :
product improvement hiring additional staff advertising – e.g. improving your logo automation of business processes
21This project is co-funded by theEuropean Union and the Government of Jamaica
REINVESTING IN YOUR BUSINESS
• Vision without action is a daydream; Action without vision is a nightmare
• He that will not apply new remedies must expect new evils.
• If failure is not an option, then success cannot mean much
• SUCCESS IS A JOURNEY…. NOT A DESTINATION
22This project is co-funded by theEuropean Union and the Government of Jamaica
Let’s Talk
Questions & Answers