Question

A local family business is facing a dilemma. Dottie’s Grocery has been a landmark company in a small city located in the United States. Over the past 45 years, what began as a single fresh fruit and vegetable store, has now become a full-service grocery store chain with many stores throughout the city. Dottie’s is incorporated with only 7 shareholders, which are all family members. They are faced with a decision on how to raise much needed capital to maintain its current business operations and to allow the possibility of growth in the future. The family believes it needs an additional $23 million dollars. This sum is too large for a bank line of credit and no one in the family has additional funding to invest into the company. The family is considering other alternatives.

One alternative is to publicly issue debt (corporate bonds), the other alternative is to issue common stock to the public. Using your expertise in financial management, you have been asked by the management team of Dottie’s Grocery to conduct an analysis of the current situation and provide a summary of your recommendations. In your summary you must:

• Describe the process (in detail) of how a public offering occurs.
  • A chronological account of how most public offerings would be an appropriate format, although not required.

• Discuss the impact and implications of each alternative.
• Explain how each alternative affects control over the company.

• As a small family business, the internal affairs and finances of the company were well guarded from the public view by the family.
  • As a new IPO, how would the guarding of their finance change?
  • What are the financial reporting effects of this decision?
  • How will additional debt impact future earnings?
  • How will new stockholders change the management of the company?

Superior papers will explain the following elements:

• Provide a narrative about the impact of issuing stock to the public. The narrative will include the topics of loss of control of the company and the requirements that future financial statements will be available to the public.
• Provide a narrative about the impact of issuing debt to the public. The narrative will include the topics of a potential loss of the company if debt covenants are breached and the requirements that future financial statements will be available to the public.
• Provide a narrative on the initial public offering (IPO) process using at least four research sources in addition to the textbook material. The narrative of the IPO process steps should include the:
  • role of an investment banker
  • deal negotiation
  • preparation and submission to the SEC of the registration statement
  • SEC approval
  • setting an issue date
  • setting an issue price

Answer 1

Dottie’s Grocery was running business successfully from past 45years in US. Dottie’s is having 7 shareholders with all family members to be part of it. The Family requires 23 Million Dollars.

The business requires funds round the clock. Running a business requires lots of efforts and great deal of capital. But when we rethink to raise the level of capital the first thing comes in our mind is “MONEY”.

The Potential Strategies comes in our mind to raise the level of capital will be: -

Raise Capital

Debt

Equity

     AND

                                                                                                                                        

The Prudent Finances have the basket of strategies having both as it involves the risk as well the safe part. Through them the companies can fuel up the finances and raise their capital.

1. Debt Finance

It includes basically 2 types of finances: -

1. Loan – Even 75 % of business are funded through loans as per the Small business administration (SBR) . Just the small homework in advance will help you to apply for loan easily like need to provide the below documents while applying for the loan.

• Profit and loss statement
• Balance sheet
• Tax returns
• Bank Statements.

2. Bonds – In this instead of going through a Bank we can issue the Bonds which will mature at the certain point of time and investor can purchase those bonds in terms of interest payments.

2. Equity Finance

1. Venture Capital – In this type of funding company needs to be little mature in managing day to day activities. They must be able to earn little returns for the fund.

Best VC Firm is “SEQUOIA” which states that we need to impress the lender in first 5 minutes that why they shall love our business.

2. Angel Investor – They generally operate alone but can pitch with others to form a fund so we just need to prepare a good pitch and action plan for the investment.
3. Initial Public offering – In this we need to issue stock in the primary market after which they are traded in the secondary market.

Different sources of Finance to raise a capital will be: -

1. Applying for Loan
2. Angel investment
3. Venture Capital
4. Public offering
5. Bonds
6. Can Get Working Capital through Credit card 0% interest Policy.

Capital Structure simply explains the stability of the company is having with the blend of Debts and Equities. Whereas, Debt Equity ratio is really important to understand the risk company is having.

D/E Ratio Formula and Calculation

Debt/Equity = Total Liabilities/ Total Shareholder’s Equity

Where,

Asset= Liabilities + Shareholder’s Equity

Where the Debt is lower and Equity is higher that will be the Low-risk company and a better investment Company.

In nutshell, to have the potential strategies to raise capital we must act in time with Debt and Equity and need to keep in mind the below:

1. Need not to wait till end as it’s a common fallacy most business that make.
2. Enough working capital must be there.
3. Need to raise funds with above strategies as and when required.
4. Personal investment is also a pre-requisite.

Hence, company needs to keep a watch on all suggestions stated above.

• If the Funding is done then it will affect the company as below: -
  1. If Funding is done by selling shares of stock then it has no impact on firm’s profitability, but it can dilute the existing shareholder’s holdings because net income will be divided among the shareholders.
  2. If funds are raised by DEBT then it will have positive impact as it will increase the cash flows and liabilities in Balance sheet side.
• Change management is “a comprehensive, cyclic and structured approach for transitioning individuals, groups and organizations from a current state to a future state with intended business benefits” .The practice of change management work to productively structure the anticipation of, organization of, and response to individual and group reactions to the introduction of a change to an environment. Given that projects and programs regularly are structured to produce intended changes to an environment, there is clearly overlap and opportunity in leveraging the practice of change management to aid in successful implementation of those intended changes.
• The practice of change management focuses on the “human” element to what typically plays out in a project or program. Change management is built on a study of human reactions to change.