Question

Case 3

Jacquii LLC

Should a Young Entrepreneur Accept a Potential Investor’s Terms that Require Her to Give Up Control of Her Business?

Jacqui Rosshandler grew up in Australia but was drawn to New York City, where she worked as legal counsel for an interior design company. She put in long hours at her job, but her goal was to one day own a business of her own, just like her father did back in Australia. “If I am going to work this hard, I want to do it for myself,” she recalls thinking. One New Year’s Day, with her mouth feeling less than fresh, Rosshandler recalled Odor-Go, a breath mint sold in Australia that really worked. She had never seen a similar product in the United States and decided to start a company to produce and market one. She realized that the best way to eliminate bad breath was to treat the source of the problem, the stomach, rather than its symptoms, which appear in the mouth, as most breath mints do. Rosshandler decided to launch a company, Jacquii LLC, and began working with a contract manufacturer to develop a unique breath-freshening product. “Parsley has been used for generations to freshen breath,” she says, “but freshening the mouth only, especially after consuming pungent foods, doesn’t get rid of the smell that comes from the stomach. We found that a combination of concentrated peppermint and parsley oils, when dissolved in the stomach, provides this fresh feeling from within. Your breath actually smells good from deep inside, not just superficially from the mouth.”

The result of several months of work was a two-step breath-freshening product that Rosshandler named Eatwhatever to give her product a trendy, fun image. Customers swallow a gel cap filled with an all-natural concentration of peppermint and parsley oils and then pop one of the package’s small white mints into their mouths for instantly fresh breath. Rosshandler came up with a clever tagline, “2 Steps to Kissable Breath,” aimed squarely at her target audience—young people—and hired a package designer to create a clever package. She began marketing her new breath freshener herself, walking boldly into the flagship C.O. Bigelow apothecary store in Manhattan and asking, “Who does the buying here?” She actually met with a buyer and left the store with her first sale. “I had no idea what I was doing,” she recalls with a laugh. A month later, a friend who worked in public relations convinced DailyCandy, a popular Web site that focuses on fashion, food, and fun, to mention Eatwhatever, generating $20,000 in orders on her Web site in just 12 hours. With a distributor’s help, Rosshandler was able to get Eatwhatever in retail stores such as Zitomer, Ricky’s, and Joe Coffee in New York City; Collette in Paris; Terry White Chemists in Sydney; and online at Amazon, Victoria Health, an Shopmasc. Sales volume for the company’s first three years of operation was small, never exceeding $40,000.

Rosshandler had used her own money to create her product and bring it to market, but getting widespread distribution and generating significant sales would require a lot more money than she could invest in her small business. The promising business was about to run out of cash, and Rosshandler was considering shutting it down and getting another job. Then, through her network of contacts, Rosshandler met Arthur Shorin, who had recently sold his business, the Topps Company, which is famous for selling bubble gum packaged with collectible baseball cards. Shorin had extensive knowledge and experience in a similar industry and had an impressive network of contacts. Shorin was impressed with Rosshandler and Eatwhatever and offered to invest a minimum of $250,000 (more if necessary) to propel the company’s growth. There was a catch, however, and it was a big one. In return for his investment, Shorin would own 75 percent of Jacquii LLC leaving Rosshandler with minority ownership of just 25 percent. He also offered terms that would allow her to regain 15 percent of the company, bringing her total ownership to 40 percent, if Eatwhatever met certain financial and performance benchmarks. The offer also included a job for Rosshandler at Artuitive, Shorin’s business incubator for start-up companies.

Rosshandler talked to several friends about the deal, and they advised her to reject Shorin’s offer, citing what one friend called “draconian terms”; even if the company met the performance benchmarks, she would still own just 40 percent of what was once “her company.” Another pointed out that by giving up 75 percent of her company for an investment of $250,000, she was saying that her company was worth just $333,333 ($250,000 ÷ 75%). Rosshandler listened to her friends’ advice but kept thinking, “Isn’t owning 25 percent of something better than owning 100 percent of nothing?”

1.What other potential sources of financing for Jacquii LLC do you recommend Rosshandler explore? Explain.

2.What are the advantages and the disadvantages of using equity capital and debt capital to finance a small business’s growth?

3. What steps could Rosshandler have taken to avoid her company’s cash flow problem?

4. Should Jacqui Rosshandler accept the investment offer from Arthur Shorin? Explain.

Write a 1-2 page paper detailing the above questions, and be sure to cite your references.

Answer 1

1.

It’s firmly been believed that initial financing sources required at the preliminary stage of a business needs a careful examination and evaluation of the various available sources of funds before actual accumulation, execution and implementation of funds in the business.

Thus first and foremost you should make it a point to consider the amount of funds needed and essentially when you require those funds as the ?nancial necessities of an organization are obliged to diverge depending on the type and size of the enterprise.

For instance manufacturing businesses are normally considered to be much more capital intensive where generally it is believed that it needs huge amount of funds as the initial capital base whereas retail business comparatively requires much less funds to commence with its business process.

However debt and equity capital can be considered to be major sources of ?nancing business activities whereas government grants to ?nance certain elements of a business can also be considered as a potential alternative option.

2.

Financing business activities through equity is considered to be less risky because you don’t have to compensate with any kind of fixed monthly installments to reimburse and it can be predominantly significant with any kind of startup business which may not have any constructive cash flows during the initial periods. Furthermore even equity investors do not anticipate getting an instantaneous gain on their investment as they invest with a long-term goal and objective.

However equity investors anticipate getting a substantial return on their investment thus the business owner must be prepared to distribute some of the organization revenue with their equity partners. Thus the amount of money compensated to the partners could be higher than the interest rates on debt financing.

Debt Financing is a type of credit finance taken to fund their business activities however the association ends when the debt is repaid and the lender does not have any say in how the proprietor runs his business. However debt financing entails compulsory regular principal and interest payments thus business with volatile cash flows can face serious problems while enduring the loan payments for instance decline sales revenue can create severe tribulations in conveying the loan repayment commitments.

3.

Cash flow refers to the term of inflow and outflow of cash in a business pertaining to operational related activities. Thus it’s important to preserve a good cash flow system in a business for which you can incorporate an appropriate credit control system to collect funds payable by your consumers.

Furthermore organizations with sufficient cash reserves from preceding profits can survive without profit for a while but constant business losses can ultimately lead to cash flow crisis. Thus it’s significant to go to the source cause of any losses suffered and take immediate corrective actions to become profitable for instance boosting the sales price, controlling expenses etc.

4.

Deciding upon an investor and finalizing the terms of the financing can sometimes be a very tiresome task but however your utmost concentration should be on finding the right fit which is considered as crucial while securing the right partnership in business.

Thus accepting outside investment varies with case to case basis moving forward with this kind of arrangement can be considered as a huge step for your business and should be taken very seriously.

It’s understandably tempting to bite at any offer that comes your way, but if your administration team can carry out as per your business plan then you can maximize the value in your business.