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i
Entrepreneurial Finance
Entrepreneurial Finance
Concepts and Cases
Second edition
Contents
MODULE 1
Getting Started with Cases 1
MODULE 2
Getting Money and Getting Going 17
4 Financing a Business 59
Case Study 4.1 88
Case Study 4.2 90
vi
vi Contents
MODULE 3
Measuring Performance in the Short Term 93
MODULE 4
The Mechanics of Finance 167
MODULE 5
Measuring Performance in the Long Term 241
MODULE 6
Exit Strategies 303
Contents vii
MODULE 7
A Winning Approach 329
Glossary 343
Index 349
vi
Case Contributors
Case Contributors ix
Douglas Chene, PhD, CPA is Chairperson and Associate Professor in the
Accounting and Finance Department at the Bertolon School of Business,
Salem State University. His research focuses on tax strategy and compliance
including non-profit organization issues such as unrelated business income
tax and the disposition of restricted assets when non-profit organizations
reorganize. He is beginning a project on tax strategy for cannabis businesses.
Professor Chene has published in numerous journals including the Journal of
Taxation and Accounting Forum. He has been a Certified Public Accountant
since 1994.
Edward Desmarais, DBA is retired Professor of Management at the Bertolon
School of Business, Salem State University. He has four published cases and
uses cases extensively in his teaching. His research interests include business
strategy and strategy implementation. He received awards for teaching and
writing.
Caroline Glackin, Assistant Professor in the Department of Management,
Marketing and Entrepreneurship of Fayetteville State University's
Broadwell College of Business and Economics, is the author of works
on access to microloan capital, the potential for behavioral economics
to inform an understanding of the borrowing process, and the role of
savings as a proxy for credit history. She has co-authored research on
entrepreneurial finance courses and the range of pedagogies employed
in entrepreneurial finance education. Dr. Glackin has co-authored texts
with Network for Teaching Entrepreneurship founder Steve Mariotti
entitled Entrepreneurship, 3e and Entrepreneurship and Small Business
Management, 2e.
Karen Hallows, PhD is a lecturer in the finance department at the Robert
H. Smith School of Business, University of Maryland. She currently teaches
business finance in the undergraduate program. Her current research focuses
on case writing in finance. Prior to joining the Smith School, Karen was
the director of the executive MBA program and finance faculty member at
George Mason University (GMU) from 1998–2011. In 2009, she was awarded
one of six GMU University-wide Teaching Excellence Awards. Karen has led
many short-term study abroad courses around the world and has conducted
finance executive education seminars.
Bill Hamilton is the Entrepreneur in Residence in the Hull College of Business
and an Assistant Professor of Neurology in the Medical College of Georgia
at Georgia Regents University. He received a B.A. in History/Economics
from Emory University and a Masters in Business Administration and
Health Administration from Georgia State University. Bill is a founder of
REACH Health, Inc., which provides a clinical interface for the treatment
of acute stroke via a web-based telemedicine system. While at REACH he
filled many roles, including Executive Vice President, Interim President/CEO,
Chief Operating Officer, and Key Account Manager.
x
x Case Contributors
Jeannette Herz is a full-time Professor and coordinator of Blended and Traditional
courses in Accounting and Administration Program at Universidad Peruana
de Ciencias Aplicadas (UPC). She works with graduate and undergraduate
students in business, teaching accounting courses, and since 2015, specific-
ally designing blended courses, which implies instructional design and class
materials. Her original professional training was as an accountant, and she
worked in various local and foreign companies as Finance and Administration
Manager, which has allowed her to tell real experiences about the import-
ance of the courses she teaches and develop cases as class material. She
has published an accounting text and has degrees from the Universidad del
Pacífico in Peru and the Universidad Andrés Bello in Chile.
David C. Hess MD is Chairman, Professor, and Distinguished Presidential Chair
in the Department of Neurology at the Georgia Regents University. He is Co-
Director of the Brain and Behavior Discovery Institute at GHSU. He is a
graduate of the Johns Hopkins University and the University of Maryland
School of Medicine. Dr Hess is Board Certified in Internal Medicine,
Neurology, and Vascular Neurology. He has been named one of America’s
Top Doctors and Best Doctors in America every year since 2000. He has over
150 peer-reviewed publications and has been involved in basic, pre-clinical,
and clinical stroke research for almost 20 years.
Simon Medcalfe is an Associate Professor of Finance and Director of Graduate
Studies in the Hull College of Business at Georgia Regents University. He
received his PhD in business and economics from Lehigh University in
Bethlehem, PA. He has published cases focusing on businesses in the sports
and healthcare industries. Other published articles and research interests
include the economics of religion and economics education.
Kirk Ramsay owns several businesses in Maine, including Bangor Window
Shade and Drapery Company (co-owner) and Ramsay Guitars, a maker
of handcrafted guitars, as well as several apartment complexes. Whether
working at his camp on the Penobscot River, accessible only by boat, or any
of his woods cottages scattered throughout Northern Maine, he is always
accompanied by his two huskies, Wylie and Ike. He graduated with a degree
in finance from the University of Maine.
Gina Vega, PhD is retired Professor of Management at the Bertolon School of
Business, Salem State University and Founding Director of the Center for
Entrepreneurial Activity. She is widely published in academic journals and
has written seven books. Prof. Vega is a Fulbright Specialist (Russia 2010;
UK 2012), past president of the CASE Association, a CASE Fellow, Editor
of The CASE Journal and past associate editor of the Journal of Management
Education. She has received numerous awards for case teaching, case research,
case writing, and mentoring of case writers. Her research interests include
small business transitions, corporate social responsibility, and organizational
structure.
xi
Case Contributors xi
John Voyer has advised many public and private concerns, has authored many
journal and conference articles in his fields of strategy, organization theory
and system dynamics, and is a member of the editorial board of Problems
and Perspectives in Management. He has held the title of Price-Babson Fellow
(2000) and Sam Walton Fellow (since 2003) and has taught in the executive
course in the Art and Practice of Leadership Development at the Harvard
Kennedy School. He has served as Dean, Associate Dean and Director of the
University of Southern Maine’s School of Business, where he has taught for
27 years.
Susan White is a Distinguished Tyser Teaching Fellow at the University of
Maryland, College Park. She teaches corporate finance for undergraduates
and MBAs. She received her undergraduate degree from Brown University,
MBA from Binghamton University and PhD in finance from the University
of Texas, Austin. Susan’s primary area of research is case studies, with
cases and articles published in the Business Case Journal, CASE Journal,
Case Research Journal, Journal of Financial Education, Journal of Financial
Research, International Journal of Financial Education, a restructuring case
book and personal finance collection.
xi
Foreword
Foreword xiii
Dr. Lam is professor of finance at the Bertolon School of Business at Salem
State University, where she has taught a wide variety of finance courses, including
Entrepreneurial Finance, and served as chair of the Accounting and Finance
department for nine years. She has numerous case and academic publications,
and is past executive editor of the Journal of Business and Economic Studies.
She is also a Chartered Financial Analyst (CFA).
While I was still at the Bertolon School, they realized that texts and books
that were available in this subject were basically non-existent or that the topic
was only covered in a tangential way. Yet, as a critical piece to the success of
the aspiring entrepreneur, the subject deserved its own treatment. Together,
Drs. Vega and Lam form the perfect team to undertake a text design to change
teaching entrepreneurial finance. In addition to their expertise in both entrepre-
neurship and finance, they have used their networks to reach out to master case
writers across the country to write the cases that are integral to this book. The
result of this collaboration has been outstanding, evidenced by its progression
to the second edition.
As a former entrepreneur myself, Vega and Lam get the content just right.
They understand that cash flow is often the single most important concept for
the aspiring owner and have added an additional cash flow case, “Contemplating
Cash: Matte Beauty LLC.” The authors have expanded the chapters on
business ownership and financing and added a new chapter on business models,
understanding that many entrepreneurs are not “business people,” but “idea
people” with a passion for what they want to accomplish, but little true business
background.
By concentrating on finding specific and engaging cases to illustrate important
concepts, Vega and Lam make understanding the complexities of entrepre-
neurial finance more approachable. Case studies provide a particularly good
way to illustrate the concepts included in the book and help students develop a
hands-on understanding. In addition, while written as a textbook, the cases and
the methodology developed in it for analyzing them is also the perfect guide for
the entrepreneur who lacks access to a class. After all, analyzing a case study is
very much like what business owners do when deciding what to do in their own
businesses.
The book starts with the basics, gradually adding complexity in both the
material and the cases presented. While there are a variety of businesses illustrated
in the book’s cases, several of them appear throughout the book, either as mul-
tiple cases for Coos Bay Organic Products, or as examples throughout the text,
as with Peace Blossom and Tasty Taco. This approach really helps students work
through each challenge the same way they are likely to experience them in their
own ventures.
In this new edition Vega and Lam have kept their attention squarely on
keeping current in a rapidly changing business landscape. To do so, they have
added six new cases while deleting four from the first edition, keeping content
fresh and up-to-date. In addition, they expanded their focus on business start-
ups, as well as more emphasis on online businesses, crowdfunding, and other
alternative and non-traditional funding sources and social ventures. Readers will
vxi
xiv Foreword
find themselves both informed and challenged every step of the way through
this new edition. In addition, instructors in Entrepreneurial Finance will find a
wealth of new teaching materials on the course website, which contains lecture
slides, case instructor’s manuals, test bank, and interactive exercises.
In short, instructors, students, and business owners alike will benefit from this
new edition of Entrepreneurial Finance. From its approachable and straightfor-
ward writing to its clear conceptual development, to its appealing cases, this text
is one that readers, from those looking to improve their financial understanding
for their small enterprises to hopeful entrepreneurs looking to exit down the
road, will keep and refer to on many occasions.
K. Brewer Doran, PhD
Dean, College of Business
University of Wisconsin-Eau Claire
December 2019
xv
Preface
We came to write this book initially out of frustration! Our undergraduate non-
finance students were struggling to learn the basics of finance for entrepreneurs
because of the density with which most books on the subject were written.
We thought carefully about this and concluded that it’s just not that hard. If
presented in a need-to-know way, the complexities of entrepreneurial finance
could be made accessible to undergraduate business students, without dumbing
down the content. Plus, we are both committed to teaching with cases and
believe passionately that students’ ability to apply concepts appropriately can be
developed through the use of case examples.
As a finance professor and an entrepreneurship professor who have written
together successfully in the past, we decided to test the market and determine the
interest level among our peers nationally. We asked at conferences, we examined
the existing books, and we spoke to as many colleagues as were willing to dis-
cuss our proposed project. The response was universally favorable so two purists
began the process of unpacking finance to its critical elements and soliciting
new, unpublished cases about real companies to illustrate these elements.
The result was the first edition of this text, designed for handling the unique
financial challenges often faced by start-ups and small businesses, written for the
upper-level undergraduate business major and focuses heavily on the basics. The
second edition has the same goals for the same audience, but the audience and
the business environment have both changed in the intervening half dozen years.
New business models and practices have evolved. Technology has improved and
become much more sophisticated. Funding methods have become more complex
and more varied.
Thanks to the input of many in the teaching community (and to student input
as well), we have made meaningful changes to this edition of Entrepreneurial
Finance: Concept and Cases, while leaving the fundamentals unchanged except
for updates. The following are the changes we have made for the second edition:
xvi Preface
• We have made corrections in some of the data.
• We expanded the chapters on forms of business ownership and financing.
• We added a new chapter on business models.
• We updated several cases, removed four cases, and included seven additional
new cases.
• We deleted some less useful appendix material.
Each main concept is illustrated by a short case (between 500 and 1,500 words),
followed by thoughtful questions to enhance learning. These cases are written
by an international group of experienced case writers from the fields of finance
and entrepreneurship and deal with real companies, real problems, and cur-
rently unfolding issues. The 12 chapters or building blocks of entrepreneurial
finance are designed to be taught across a full semester. A starting chapter that
provides guidance about the use of cases for students and a concluding chapter
that delivers information about how to win business plan competitions round
out the offering.
We hope you will find this text as useful as we found it enjoyable to write!
Gina Vega
Miranda S. Lam
12
Implementation
1 Agree on a valuation
2 Structure the deal internally
3 Negotiate with the seller for a mutually agreeable acquisition
The Facts
The entrepreneur knew a little bit about a lot of things, but not enough about any
one of the functional elements of his business to run it on his own. He had insuf-
ficient funds to last through a dry spell; he was being pushed to launch because
the landlord of his desired location was in a hurry to get the lease signed. He did
not have a full liquor license. Money was tight, loans were nonexistent, and his
debt to asset ratio did not approach the industry standard. It also looks like he
needs to do a closer examination of his anticipated revenues.
Inferences to Be Drawn
The Howling Wolf is likely to create value for the customer, as there appears
to be growing demand for this type of cuisine and there is little direct compe-
tition. However, the money-making potential of the restaurant is unclear, and
the owner’s ability to sustain operations with the proposed family/friends staff is
doubtful. A launch would be a high risk/minimal reward strategy.
Another random document with
no related content on Scribd:
damned nigger!" The boxer hauled back and hit him in the mouth
and he dropped to the pavement.
We hurried away to the restaurant. We sat around, the poor woman
among us, endeavoring to woo the spirit of celebration. But we were
all wet. The boxer said: "I guess they don't want no colored in this
damned white man's country." He dropped his head down on the
table and sobbed like a child. And I thought that that was his
knockout.
I thought, too, of Bernard Shaw's asking why I did not choose
pugilism instead of poetry for a profession. He no doubt imagined
that it would be easier for a black man to win success at boxing than
at writing in a white world. But looking at life through an African
telescope I could not see such a great difference in the choice. For,
according to British sporting rules, no Negro boxer can compete for a
championship in the land of cricket, and only Negroes who are
British subjects are given a chance to fight. These regulations have
nothing to do with the science of boxing or the Negro's fitness to
participate. They are made merely to discourage boxers who are
black and of African descent.
Perhaps the black poet has more potential scope than the pugilist.
The literary censors of London have not yet decreed that no book by
a Negro should be published in Britain—not yet!
VII
A Job in London
YET London was not wholly Hell, for it was possible for me to
compose poetry some of the time. No place can be altogether a
God-forsaken Sahara or swamp in which a man is able to discipline
and compose his emotions into self-expression. In London I wrote
"Flame-heart."
So much I have forgotten in ten years,
So much in ten brief years! I have forgot
What time the purple apples come to juice,
And what month brings the shy forget-me-not.
I have forgot the special, startling season
Of the pimento's flowering and fruiting;
What time of year the ground doves brown the fields
And fill the noonday with their curious fluting.
I have forgotten much, but still remember
The poinsettia's red, blood-red in warm December.
My mother is Zebeeda,
I disavow not her name and I am Antar,
But I am not vainglorious ...
Her dark complexion sparkles like a sabre in the shades of night
And her shape is like the well-formed spear....
To me these verses of Antar written more than twelve centuries ago
are more modern and full of meaning for a Negro than is Homer.
Perhaps if black and mulatto children knew more of the story and the
poetry of Antar, we might have better Negro poets. But in our Negro
schools and colleges we learn a lot of Homer and nothing of Antar.
PART THREE
NEW YORK HORIZON
IX
Back in Harlem
LIKE fixed massed sentinels guarding the approaches to the great
metropolis, again the pyramids of New York in their Egyptian majesty
dazzled my sight like a miracle of might and took my breath like the
banging music of Wagner assaulting one's spirit and rushing it
skyward with the pride and power of an eagle.
The feeling of the dirty steerage passage across the Atlantic was
swept away in the immense wonder of clean, vertical heaven-
challenging lines, a glory to the grandeur of space.
Oh, I wished that it were possible to know New York in that way only
—as a masterpiece wrought for the illumination of the sight, a
splendor lifting aloft and shedding its radiance like a searchlight,
making one big and great with feeling. Oh, that I should never draw
nearer to descend into its precipitous gorges, where visions are
broken and shattered and one becomes one of a million, average,
ordinary, insignificant.
At last the ship was moored and I came down to the pavement. Ellis
Island: doctors peered in my eyes, officials scrutinized my passport,
and the gates were thrown open.
The elevated swung me up to Harlem. At first I felt a little fear and
trembling, like a stray hound scenting out new territory. But soon I
was stirred by familiar voices and the shapes of houses and saloons,
and I was inflated with confidence. A wave of thrills flooded the
arteries of my being, and I felt as if I had undergone initiation as a
member of my tribe. And I was happy. Yes, it was a rare sensation
again to be just one black among many. It was good to be lost in the
shadows of Harlem again. It was an adventure to loiter down Fifth
and Lenox avenues and promenade along Seventh Avenue.
Spareribs and corn pone, fried chicken and corn fritters and sweet
potatoes were like honey to my palate.
There was a room for me in the old house on One Hundred Thirty-
first Street, but there was no trace of Manda. I could locate none of
my close railroad friends. But I found Sanina. Sanina was an
attractive quadroon from Jamaica who could pass as white. Before
prohibition she presided over a buffet flat. Now she animated a cosy
speakeasy. Her rendezvous on upper Seventh Avenue, with its pink
curtains and spreads, created an artificial rose-garden effect. It was
always humming like a beehive with brown butterflies and flames of
all ages from the West Indies and from the South.
Sanina infatuated them all. She possessed the cunning and
fascination of a serpent, and more charm than beauty. Her clients
idolized her with a loyalty and respect that were rare. I was never
quite sure what was the secret of her success. For although she was
charming, she was ruthless in her affairs. I felt a congeniality and
sweet nostalgia in her company, for we had grown up together from
kindergarten. Underneath all of her shrewd New York getting-byness
there was discernible the green bloom of West Indian naïveté. Yet
her poise was a marvel and kept her there floating like an
imperishable block of butter on the crest of the dark heaving wave of
Harlem. Sanina always stirred me to remember her dominating
octoroon grandmother (who was also my godmother) who beat her
hard white father in a duel they fought over the disposal of her body.
But that is a West Indian tale.... I think that some of Sanina's success
came from her selectiveness. Although there were many lovers
mixing up their loving around her, she kept herself exclusively for the
lover of her choice.
I passed ten days of purely voluptuous relaxation. My fifty dollars
were spent and Sanina was feeding me. I was uncomfortable. I
began feeling intellectual again. I wrote to my friend, Max Eastman,
that I had returned to New York. My letter arrived at precisely the
right moment. The continuation of The Liberator had become a
problem. Max Eastman had recently resigned the editorship in order
to devote more time to creative writing. Crystal Eastman also was
retiring from the management to rest and write a book on feminism.
Floyd Dell had just published his successful novel, Moon Calf, and
was occupied with the writing of another book.
Max Eastman invited me to Croton over the week-end to discuss the
situation. He proposed to resume the editorship again if I could
manage the sub-editing that Floyd Dell did formerly. I responded with
my hand and my head and my heart. Thus I became associate editor
of The Liberator. My experience with the Dreadnought in London
was of great service to me now.
The times were auspicious for the magazine. About the time that I
was installed it received a windfall of $11,000 from the government,
which was I believe a refund on mailing privileges that had been
denied the magazine during the war.
Soon after taking on my job I called on Frank Harris, I took along an
autographed copy of Spring in New Hampshire, the book of verses
that I had published in London. The first thing Frank Harris asked
was if I had seen Bernard Shaw. I told him all about my visit and
Shaw's cathedral sermon. Harris said that perhaps Shaw was getting
religion at last and might die a good Catholic. Harris was not as well-
poised as when I first met him. Pearson's Magazine was not making
money, and he was in debt and threatened with suspension of
publication. He said he desired to return to Europe where he could
find leisure to write, that he was sick and tired of the editor business.
He did not congratulate me on my new job. The incident between
him and The Liberator was still a rancor in his mind. He wasn't a
man who forgot hurts easily.
But he was pleased that I had put over the publication of a book of
poems in London. "It's a hard, mean city for any kind of genius," he
said, "and that's an achievement for you." He looked through the little
brown-covered book. Then he ran his finger down the table of
contents closely scrutinizing. I noticed his aggressive brow become
heavier and scowling. Suddenly he roared: "Where is the poem?"
"Which one?" I asked with a bland countenance, as if I didn't know
which he meant.
"You know which," he growled. "That fighting poem, 'If We Must Die.'
Why isn't it printed here?"
I was ashamed. My face was scorched with fire. I stammered: "I was
advised to keep it out."
"You are a bloody traitor to your race, sir!" Frank Harris shouted. "A
damned traitor to your own integrity. That's what the English and
civilization have done to your people. Emasculated them. Deprived
them of their guts. Better you were a head-hunting, blood-drinking
cannibal of the jungle than a civilized coward. You were bolder in
America. The English make obscene sycophants of their subject
peoples. I am Irish and I know. But we Irish have guts the English
cannot rip out of us. I'm ashamed of you, sir. It's a good thing you got
out of England. It is no place for a genius to live."
Frank Harris's words cut like a whip into my hide, and I was glad to
get out of his uncomfortable presence. Yet I felt relieved after his
castigation. The excision of the poem had been like a nerve cut out
of me, leaving a wound which would not heal. And it hurt more every
time I saw the damned book of verse. I resolved to plug hard for the
publication of an American edition, which would include the omitted
poem. "A traitor," Frank Harris had said, "a traitor to my race." But I
felt worse for being a traitor to myself. For if a man is not faithful to
his own individuality, he cannot be loyal to anything.
I soon became acquainted and friendly with The Liberator
collaborators and sympathizers: Art Young, Boardman Robinson,
Stuart Davis, John Barber, Adolph Dehn, Hugo Gellert, Ivan Opfer,
Maurice Becker, Maurice Sterne, Arturo Giovanitti, Roger Baldwin,
Louis Untermeyer, Mary Heaton Vorse, Lydia Gibson, Cornelia
Barnes, Genevieve Taggard. William Gropper and Michael Gold
became contributing editors at the same time that I joined The
Liberator staff.