Entreprenurship's Notes

THE BUSINESS PLAN CHAPTER NO.7

What is a business plan?

Business plan is a written document prepared by the entrepreneur that describes all the relevant external and internal elements involved in starting a new venture. It is often an integration of functional plans such as marketing, finance, manufacturing, and human resources.

Who should write the Plan?

Business should be prepared by the Entrepreneur with the help of Lawyers, Accountants, marketing consultants, and Engineers. Some of these sources can be found through services offered by the small business administration (SBA), service core of retired executives’ (SCORE), small business development centers (SBDC), universities, and friends or relatives etc.

Who reads the Business Plan?

Business Plan may be read by Employees, Investors, Bankers, Venture Capitalists, Suppliers, Customers, Advisors, and Consultants.

However there are three perspectives that should be considered in preparing the plan.

1) Entrepreneur: The entrepreneur must be able to clearly articulate what the venture is all about. He is the one who understands the creativity and Technology involved in the new venture better than anyone.

2) Marketing perspective : Entrepreneur must try to view the business through the eyes of the customer.

3) Investors’ perspective : Entrepreneur should try to view his business through the eyes of the investor.

How do Potential Lenders and Investors Evaluate the Plan?

Typically lenders focus on the four Cs of the credit: character, cash flow, collateral, and equity contribution. This is because lenders want the business plan to reflect the

Compiled by Syed Fahad Hussain 2k8/bba/173

entrepreneur’s credit history, the ability of the entrepreneur to meet debt and interest payments (cash flow), the collateral or tangible assets being secured for the loan, and the amount of personal equity that the entrepreneur has invested.

Information needs

The entrepreneur should do a quick feasibility study of the business concept to see whether there are any possible barriers to success. The information obtained, should focus on marketing, finance, and production. The internet can be a valuable source for entrepreneur. The goals and objectives of the venture should be clearly defined before beginning the feasibility study, this provides a framework for the business, marketing and financial plan.

Market information

In order to ascertain the size of the market, it is first necessary for the entrepreneur to define the market. For example, is the product most likely to be purchased by men or women? People of high income or low income? Rural or urban dwellers? Highly educated or low educated? A well-defined target market will make it easier to project market size and subsequent market goals for the new venture.

In order to build a strong marketing plan with reasonable and measurable market goals and objectives the entrepreneur will need to gather information on the industry and market. We will consider the example of food business. The best way to start is to first visualize this process as an inverted pyramid (fig.7.1)


We will consider the example of food business.

The process begins with evaluating general environmental trends. This would include household income trends, population shifts, food consumption habits and trends, travel, and employement trends.

The next step is the assessment of trends in the national food service industry, data is gathered by having a look at total food sales and commercial restaurant sales by type of restaurant.


Figure 7.1 An upside down pyramid approach to gathering market information

Market positioning

Market Objectives

Notice that the first two stages focus on the national market, and the next two stages consider trends in the local market where the business will be located. This consists of general local economic trends and ana assessment of the local food service industry. Also implicit in this local food service industry analysis is the regulatory environment. The final step is an analysis of the local competitive environment. In this there’s a need to identify any restaurants, fod stands, or push-cart food servise that could be a competitor.

Once all this analysis has been completed, the entrepreneur is ready to clarify the product or service offering, actual market positioning in the competitive environment, and market objectives.

Operations Information Needs

The relevance of a feasibility study of the manufacturing operations depends on the nature of the business. Most of the information needed can be obtained through direct contact with the appropriate source. The entrepreneur may need information on the following:

LOCATION: The company’s location and its accessibility to customers, suppliers,and distributors need to be determind.

MANUFACTURING OPERATIONS: Basic machine and assembly operations need to be identifed, as well as whether any of these operations would be subcontracted and to whom.

RAW MATERIALS: The raw materials needed and suppliers names, addresses. And costs should be determined.

EQUIPMENT: The equipment needed should be listed, with its cost and whether it will be putchased or leased.

LABOR SKILLS: Each unique skill needed, the number of personnel required for each skill, pay rate, and an assessment of where nad how these skills will be obtained should be determined.

SPACE: The total amount of space needed should be determined, including whether the space will be owned or leased.


OVERHEAD: Each item needed to support manufacturing- such as tools, supplies, utilities, and salaries- should be determined.

Finanacial need

Financial needs focus on three things:

1) Prepare Budget : The entrepreneur needs to prepare a budget that includes capital expeditures, direct operating expenses, and cash expeditures for noexpense items.

2) Expected income and expenditures : The revenue from sales must be forecast from market data and the expenditures should also be estimated.

3) Bench mark or financial ratios: The entrepreneur needs to identify benchmarks in the industry that can be used in preparing the fianl pro farma statements in the financial plan,. These benchmarks or norms establish reasonable assumptions regarding expenditures based on industry history and trends

Outline of a Business Plan


Table 7.2 Outline of a Business plan

1. INTRODUCTORY PAGEa. Name & address of businessb. Name(s) ^ address(es) of principal(s)c. Nature of businessd. Statement of financing needede. Statement of confidentiality of report

2. Executive summary- two or three pages summarizing the complete business plan3. Industry Analysis

a. Future outlook & trendsb. Analysis of competitorsc. Market segmentationd. Industry & market forecasts

4. Description of venturea. Product(s)b. Service(s)c. Size of businessd. Office equipment & personnele. Background of entrepreneur(s)

5. Production Plana. Manufacturing porcess (amount subcontracted)b. Physical plantc. Machinery and equipmentd. Names of suppliers of raw materials

6. Operation Plana. Descipetion of company’s operationb. Flow of orders for goods and.or servicesc. Technology utilization

7. Marketing Plana. Pricingb. Distributionc. Promotiond. Product forecastse. Conrols

8. Organizational Plan



a.Form of ownership

b. Identification of partners or principal shareholders

c. Authority of principals

d. Management-team background

e. Roles and responsibilities of members of organization

9. Assessment of Risk

a. Evaluate weakness(es) of business

b. New technologies

c. Contingency plans

10. Financial plan

a. Assumptions

b. pro forma income stetement

c. Break-even analysis

d. Sources & applications of funds

11. Appendix (contain backup material)

a. Letters

b. market research datat

c. leases or contracts

d. price lists from suppliers

Why some businees plan fail?

Generally a poorly prepared business plan can be blamed on one or more of the following factores:

1) Goals set by the entrepreneur are unreasonable2) Gpa;s are not measurable.3) The entrepreneur has not made a total commitment to the business or to the family4) The entreprenerut has no experience in the planned business.5) The entrepreneur has no sense of potentioal threats or weaknesses to the business.6) No customer need was established for the proposed product or service.

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THE MARKETING PLAN CHAPTER NO.8

Steps in preparing the marketing plan

Defining the business situation

Situation analysis: It is a review of where we have bee?. It describes the past and present business achievements of new venture.Target market: It focuses on where do we want to go( in the short term) ?. It is the specific group of potential customers toward which venture aims its marketing plan.Market Segmentation: How do we get there?. It is the process of dividing a market into definable and measurable groups for purposes of targeting markteing strategy.Management must understand that the marketing plan is a guide for implementing marketing decision making and not a generalized, superficial document.

What is marketing plan?

A marketing plan is the blueprint or the map you intend to follow in order to achieve your goals. If you are planning for existing programs, the plan will incorporate the strengths of your current effort with needed changes and improvements. If the plan is for a brand new product or service, it will pull all the elements together for an effective start on marketing.

The marketing plan must be linked to the overall goals and objectives of your organization…..your business plan.


Customers circulation Both

Competitor A Competitor B Competitor C

Industry analysis

The primary focus of the Industry Analysis is to provide sufficient knowledge of the environment (national and local Market) that can affect marketing strategy decision making. It begins with the broadest based assessment of environment and Industry trends than proceed to local market environmental and industry trend , competition.

Competitor Analysis

The information on competitors can be gathered initially by using as much public Information as possible and then complementing this with a marketing research project. Newspaper articles, websites, catalogs, promotions, interviews with distributors and customers and any other marketing strategy or company information available should be reviewed.

Table 8.1 An assessment of competitor marketing strategies and strengths and weaknesses

Competitor A Competitor B Competitor CProduct or service


strategiesPricing strategiesDistribution strategiesPromotion strategiesStengths and weaknesses

Marketing Research For the New Venture

Marketing research involves the gathering of data in order to determine such information as who will buy the product or service? What is the size of the potential market? What price should be charged? What is the most appropriate distribution channel? And what is the most effective promotion strategy to inform and reach potential customers?

Steps of marketing research

1. Defining the Purpose or Objectives

The most effective way to begin is for the entrepreneur to sit down and make a list of the inforamation that will be needed to prepare the marketing plan. One objective would be to ask people what they think of the product or service and whether they would buy it, and to collect some background demographics and attitudes of these individuals. Other objectives may be:

- How much would potential customers be willing to pay for the product or service?

- Where would potential customers prefer to purchase the product or service

- Where would the customers expect to hear about or learn about such a product or service?

- 2. Gathering Data from Secondary Sources

Before considering either primary sources or commercial sources of information the entrepreneurship should exhaust all free secondary sources. The secondary sources could be:


Trade magazines, newspaper articles,Libraries government agencies and the internet.

. 3.Gathering Information fromPrimary Sources

Gathering primary data involves a data collection procedure such as observation, networking, interviewing, focus groups, or experimentation and usually data collection instrument like questionnaire Table 8.4

Situatuion analysis Background of venture Strengths and weaknesses of venture Market opportunities and threats CompetitorMarketing objectives and goalsMarkteting strategy and action programsBudgetsControls

4. Analyzing the interpreting results

At this stage the result should be evaluated and interpreted in response to the research objectives that were specified in the first step of the research process. The data should be cross tabulated in order to provide more focused results.

Understanding the Marketing Plan

After gathering the necessary information entrepreneur can prepare the marketing plan.

MP helps an entrepreneur to compete effectively and operates in the market place to meet the objectives and goals of this new venture. It provides answers to the following questions:

1. Where have we been?

2.Where do we want to go?

3.How do we get there?


Outline for a marketing plan (table 8.4)(mentioned above)

CHARACTERISTICS OF A MARKETING PLAN

Following are the characteristics of a marketing plan:

It should provide a strategy for accomplishing the company mission or goal

It should based upon facts and valid assumptions (Table 8.6)

Allocation of resources must be well described

It should provide continuity as long term plans can be built upon them

It should be simple or short but not too short as detail of goals are excluded

It must be flexible

It must specify performance criteria that will be monitored and controlled

Difference between marketing plan and marketing system

Marketing plan means written statement of marketing objectives, strategies, and activities to be followed in business plan

Marketing System means interacting internal and external factors that affect venture’s ability to provide goods and services to meet customer needs


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THE ORGANIZATIONAL PLAN CHAPTER NO.10

Developing the management team

The management team is prepared to operate the business full time and at a modest salary. It is unaccepptable for the entrepreneurs to try to draw a large salary out of the new ventutre,and investors may perceivve any attempt to do so as a lack of psychological commitment ot the business.

Legal forms of business

There are three basic legal forms of business formation: 1) sole proprietorship. 2) partnership. 3) C corporation

1) Sole proprietorship: Form of business with single owner who has unlimited liability, controls all decisions, and receives all profits.

2) Partnership: Two or more individuals having unlimited liability who have pooled resourves to own a business.

3) C corporation: Most common form of corporation, regulated by statute and treated as a separate legal entity for liability and tax purpose.

Table (9.1) Factor’s three forms of Business formation(see @ page 266 in the book)

TAX attributes of forms of buiness

Table (9.2) tax attributes of various legal forms of business( see @ page 272 in the book)

Tax issues for proprietorship

The proprietor has some tax advantages wwhen compared with the corporation. First, there is no capital sock tasx or penalty for retained earnings in the business. These advantages exist because the proprietorship is not recognized as a separate tax entity.

Tax issues for partnership: The parntership’s tax advantages and disadvantages are similar to those of the proprietorship, especially regarding income distributions,


distributions, and capital gains and losses. Limited parnters in a traditional general partnerhip have the advantage of limited liability( they are liable only for the amount of their investment) buth they can share in the profits at a percentage stipulated in the partnership agreement. The LLP is treated the same as the LLC for tax purposes and all profits are distributed through the parners in some designated fashion as personal income.

Tax issues for corporation

Corporation is recognized as a separate tax entity, it has the advantage of being able to take many deductions and expenses that are not availabele to proprietorship or partnership. The disadvantage is that the distribution of dividends is taxed twice, as income of the corporation and as income of the stockholder.

S CORPORATION

It is special type of corporation where porofits are distributed to stockholders and taxed as personal income.

Designing the organization

Generally, the design of the initial organization will be simple. Design of the Organization will be entrepreneurs formal and explicit indication to the members of the organization as to what is expected of them. Typically these expectations can be grouped into the following five areas:

1) Organization Structure: It defines members’ jobs and the communication and relationship these jobs have with each other. This relationships are depicted in an organization chart.

2) Planning Measurement and Evaluation Schemes : It means all organization activities should reflect the goals and objectives that underlie the venture’s existence. The entrepreneur must spell out how these goals will be achieved (plans), how they will be measured and than evaluated.

3) Rewards: Members of an organization will require rewards in the form of promotions, bonuses, praise, and so on. The entrepreneur or other key managers will need to be responsible for these rewards.


4) Selection Criteria : The entrepreneur will need to determine a set of

guidelines for selecting individuals for each position.5) Training : On or off the job must be specified. This training may be in the form

of formal education or learning skills

Stages in Organizational Design figure9.1

Stage 1

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president

productiion Marketing/sales administration

Stage 2 president

Production manager

Marketing manager

Administrative manager

QC assembly sales Promotion

advertisingFinance

accountingpurchasing Shipping/

recieving

THE FINANCIAL PLAN CHAPTER NO.10

Introduction

The financial plan provides a complete picture of how much and when funds are needed, where funds are going, how much cash is available and projected financial positions of the firm. It provides the short term basis for budgeting control and helps prevent one of the most common problems for new ventures. The financial plan must explains to meet all financial obligations and maintains the venture’s liquidity in order to either pay off debt of provide a good return on

investment. FP needs three years of projected finance data to satisfy any outside

investors in which first year must reflect monthly data.

Pro forma statements

These are projections of a firm’s financial position over a future period (pro

forma income statement) or on a future date (pro forma balance sheet). Using beginning balance sheet balances, they depict projected changes on the operating and cash-flow budgets which are added to create projected balance sheet totals.

Preparing financial budget

Budget: It is one of the most powerful tools the entrepreneur can use in planning financial operations.

Operating Budget: It is a statement of estimated income and expenses over a specified period of time.

Cash Budget: It is a statement of estimated cash receipts and expenditures over a specified period of time.


Capital Budget : It is the plan for expenditures on assets with returns expected to last beyond one year.

The operating budget

Sales Forecasting: It is creating an operating budget through preparation of the sales forecast.

Forecasting

Linear regression: a statistical forecasting technique.

Y = a + bx

Y is a dependent variable—its value is dependent on the values of a, b, and x.

x is an independent variable that is not dependent on any of the other variables

a is a constant.

b is the slope of the line of correlation (the change in Y divided by the change in x).

Operating and capital budgets

Before pro forma income statement, the entrepreneur should prepare operating & capital budget. If the entrepreneur is a sole proprietor, then he or she is responsible for the budgeting decisions. In the case of a partnership, or where employees exist, the initial budgeting process may begin with one of these invdividuals, depending on his or her role in the venture. For example, a sales budget may be prepared by a sales manager, a manufacturing budget by the production manager, and so on.

Table 10.1 A sample manufacturing Budget for first three months


Proforma income statement

Projected net profit calculated from projected revenue minus projected costs and expenses. Commonly referred to as the P&L (profit and loss) statement from activities of

the firm. It provides the results of the firm’s operations. It should be made for 3 years

because investors prefer to use three years of income projections.

Table 10.3 ( see @ page 293 in book)

Income Statement Categories: Following are the categories of income statement:

Revenues: gross sales for the period

Expenses: Costs of producing goods or services

Net Income: The excess (deficit) of revenues over expenses (profit or loss)

Statement of Cash Flow

Projected cash available from projected cash accumulation minus projected cash disbursements. It isIt is an analysis of the cash availability and cash needs of the business


Description January February March

Projected sales( units)

Desired ending inventory

Less: beginning inventory

Total productin required

that shows the effects of a company’s operating, investing, and financing activities on its cash balance.

How much cash did the firm generate from operations?

How did the firm finance fixed capital expenditures?

How much new debt did the firm add?

Was cash from operations sufficient to finance fixed asset purchases?

The use of a cash budget may be the best approach for an entrepreneur starting up a venture.Cash flow can be determined for each month. It assist the entrepreneur in determining how much money he or she will need to raise to meet the cash demands of

the venture. Cash flows only when actual payments are received or made. The most

difficult problem with projecting cash flows is determining the exact monthly receipts and disbursements.

Porforma balance sheet

Represents the financial condition of a company at a certain date.

It details the items the company owns (assets) and the amount the company owes (liabilities).

It also shows the net worth of the company and its liquidity.

Assets = Liabilities + Owners’ Equity

An asset is something of value the business owns.

Current and fixed assets.

Breakeven Analysis

It is used to determine the level of activity a firm must achieve to stay in business in the long run. It shows the mix of fixed and variable cost and the volume required for zero profit/loss. Profit/loss


generally measured by EBIT. Break-even occurs when the volume of sales is sufficient to cover all fixed

and variable costs.

Break-even point (BEP) is the point at which revenue equals costs.At break-even point sales revenues equals the costs necessary to generate them.As long as forecasted sales are greater than the break-even

point, you must stay in business, if they drop below it, you may decide against starting or continuing it. BEP shows the relationship between cost and volume.

The components of break-even analysis are:

Revenue:Determined by multiplying unit sales by unit price

Fixed costs:Expenses that do not vary with the level of production or sales

Variable costs: Are those that vary directly– or proportionally– to sales.

Steps to calculate break-even analysis

Step 1

Fixed Costs- Those that remain constant over a reasonable range of sales, or do not vary appreciably with sales volume.

• Rent • Office Supplies • Advertising

• Salaries • Payroll Taxes • Utilities

• Depreciation • Interest Expense • Insurance

Determining the break-even formula ( print out or see slides from 23-27)

TR = SP x Q

TC = TFC + TVC

SP x Q = TFC+TVC


TVC = VC/units x Q

Thus SP x Q = TFC + (VC/Units x Q)

(SP x Q) – (VC/Units x Q) = TFC

Q(SP – VC/Unit) = TFC

Break-even (Q) = Total Fixed Costs

SP-VC/Unit (Marginal contribution)

Remember:

A higher price or lower price does not mean that break even will never be reached!

The BE point depends on the number of sales needed to generate revenue to cover costs – the BE chart is NOT time related!

Importance of Price Elasticity of Demand:

Higher prices might mean fewer sales to break-even but those sales may take a longer time to achieve.

Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even.

Links of BE to pricing strategies and elasticity

Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even

Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even

Elasticity – what is likely to happen to sales when prices are increased or decreased?


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SOURCES OF CAPITAL CHAPTER NO.11

Debt or Equity financing

Debt financing: Obtaining borrowed funds for the company is known as debt financing. It is a financing method involving an interest-bearing instrument, usually a loan, the payment of which is only indirectly related to the sales and profits of the venture. It is also called debt financing. Entrepreneur must be careful as it requires to pay back the amount of funds borrwed as well as a fee expressed in terms of the interest rate.

Equity financing: obtaining funds for the company in exchange for ownership is known as equity financing.It offers the investor some form of ownership position in the venture. The investor shares in the profits of the venture, as well as any dispositon of its assets on a pro data basis, based on the percentage of the business owned.

Internal funds: The funds most frequently employed are internally generated funds, internally generated funds can come from several sources within the company: profits, sale of assets, reduction in working capital, extended payment terms, and accounts recievable.

External funds: Sources of external financing need to be evaluated on three basis: the length of time the funds are available, the costs involved, and the

amount of company control lost. Sources of external funds are self, family

and friends, commercial banks, govt loan programs.


Personal funds: New ventures are started without the personal funds of the entrepreneur. Not only are these the least expensive funds in terms of cost and control, but they are absolutely essential in attracting outside funding, particularly from banks, private investors, and ventur capitalists. The typical sources of personal funds include savings, life insurance, or mortgage on a house or car.

Family and friends : After the entrepreneur, family and friends are a common source of capital for a new venture. They are most likely to invest due to their relationship with the entrepreneur. It has also a negative aspect, if the financing provided by the friends and family is in the form of equity financing, then they have an ownership position in the venture and all rights and privileges of that positon. This may make them feel they have a direct input into the operations of the venture, which may have a negative effect on employees, facilities, or sales and profits.

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FRANCHISING CHAPTER NO.15

Franchising: An arrangement whereby a franchisor gives exclusive rights of local distribution to a franchise in return for payments of royalties and conformance to standardize operating procedures.

Advantages of franchising to the franchisee:

Product Acceptance:

Management Expertise

Capital Requirements

Knowledge of the market

Operating the structural controls

Expansion Risk

Cost advantages

Disadvantages of franchising :-

Inability of franchisor to provide services, advertising etc.

The franchise may face a problem when franchisor bought out by another company

Types of Franchises :-

There are 3 types….


Dealership: A parent company grants the right to a franchisee to sell their products.

Business format franchising: Franchisors provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

Offer services: It gives the franchisee a right to sell or distribute products or render services of a particular franchisor.

Investing in a Franchise :-There are factors that must be assessed by the entrepreneur when he/she wants to

invest:

Proven vs Unproven Franchise.

Financial stability of a franchise.

Potential market for the new franchise.

Profit potential for a new franchise.

Joint Ventures

A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise.It is a separate entity that involves a partnership between two or more active participants.

Strategic alliances

Universities, Non profit organization, businesses and the public.

General Motors & Toyota

General Electric & Westinghouse.

Types of Joint Ventures

Private-sector companies: Possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree how it should be managed.


Boeing, Mitsubishi, Fuji, Kawasaki.

Cooperative research: Co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company's distribution network. The two partners could agree a contract setting out the terms and conditions of how this would work.

Micro electronics and computer technology corporation (MCC)

Industry-university agreements: Agreements created for the purpose of doing research are another type of joint venture that has seen increasing usage.

Two problems: A profit corporation has the objective of obtaining tangible results such as a patent, from its research investment and wants all proprietory rights. University wants to share in the possible financial returns from the patent, but the university researchers want to make the knowledge available through research papers.

International joint ventures: Increasing rapidly in number. Not only both companies can share in profit and growth, but the joint ventures can have low cash requirements if the knowledge or patents are capitalized as a contribution to the venture

Factors of Success

An entrepreneur needs to assess the method of growth carefully and understands the factors that helps ensure successes as well as the problems involved before using it

How to best manage entity

Ensuring relationships: the joint venture will be effective when managers can work well together.

Degree of symmetry b/w partners: the manager in each parent company as well as those in the new entity, must concour on the objectives of the new venture and the level of resources that will be provided.


Expectation of results: the expectations of results must be reasonable. It must be realistic.

Timing must be right: with environments constantly changing, industrial conditions being modified, and markets evolving, a particular joint venture could be a success one year and failure the next.

Acquisitions

Another way of expanding the venture is by acquiring an existing business Acquisition provide an excellent means of expanding business by entering into new markets or new product areas. It is purchasing all or part of a company.

Advantages

Established business: the acquired firm has an established image and track record.

Location: new customers are already familiar with the location.

Established market structure: existing channels and sales structure. Known suppliers, wholesalers, retailers, and manufacturers.

Cost: the actual cost of acquiring business can be lower than other expansion.

Existing employees: the employees of existing business already have established customers, suppliers, and channel members.

More opportunity to be creative: since the entreprenur does not have much to concern he has more opportunity to be creative.

Disadvantages

Marginal success record:most ventures that are for sale have an erratic, marginally successful, or unprofitable track record.

Overconfidence in ability:often managers are over confident in their ability to overcome cultural differences between their current business and the one being acquired.


Key employee loss: when a business changes hands, key employee also leave, this can be devastating for the entrepreneur.

Over evaluated: it is possible that the actual price is inflated due to the established image, customer base, channel members, or suppliers.

Synergy

Synergy may be defined as two or more things functioning together to produce a result not independently obtainable

“The whole is greater than the sum of its parts”

Lack = acquisition failure

Mergers

The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Department of Justice

How does it take place?

It can take place even if the company is not taken over.

Requirements. ( do yourself , mjhe bhi nahi mila)

Determining value (do yourself , mjhe bhi nahi mila)


Leveraged Buyouts

Definition: A company is acquired by specialized investment firm using a relatively small portion of equity and realtively large portion of outside debt financing.

Why buy?

Once an LBO is completed, the result is a highly geared business. This means that a good target for an LBO would have strong stable cash flows, low levels of existing debt and a strong balance sheet (assets to back the new debt).

Financing

Debt-to-equity ratio

Steps before buying

Is asking price reasonable?

Assess firm’s debt capacity

Develop appropriate financial package


Overcoming Constraints by Negotiating

There are two ways by which constraints can be overcome by negotiating.

Distribution method : The term distributive means; there is a giving out; or the scattering of things. By its mere nature, there is a limit or finite amount in the thing being distributed or divided amongst the people involved. Hence, this type of negotiation is often referred to as 'The Fixed Pie'.

Divide up the pie

Integration method : The word integrative means to join several parts into a whole. Conceptually, this implies some cooperation, or a joining of forces to achieve something together. Usually involves a higher degree of trust and a forming of a relationship

Make the pie larger

Negotiating

Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy various interests of two people/parties involved in negotiation process.

What will you do if no agreement is reached?

Reservation Price

What will the other party do if no agreement is reached?

Bargaining zone

What are underlying issues for you? How important is each issue?

Trade-offs


What are underlying issues for other party? How important is each issue?

Understanding=Increased integration

Negotiating Strategy

Build Trust and Share Information

Best outcome

Can it hurt the negotiations?

Ask Lots of Questions

Probe for preferences

Make Multiple Offer Simultaneously

Show what’s important based on choices

Used to Create Trade-offs that Result in Mutually Beneficial Outcomes

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