Question

COMPREHENSIVE CASE DAN KIM: PART 3

Dan is quite proud of his business plan and realizes that he

has learned a lot in preparing it. He also realizes, however,

that for the business to get off the ground, he needs financing.

Suzie will only let Dan use $20,000 of their savings for

the venture, but Dan is of the opinion that this will at least

help them get started. Once the business is up and running,

additional funds will be generated through sales of the

Ladder Rail.

Dan decides that he would rather establish the manufacturing

facility from scratch than purchase the plant that is for

sale. This way he can arrange the facility in a way that suits

him, and he will not have to spend money to retrofit. In addition,

Dan lives on an acreage and he already owns enough

property on which to construct the building. He estimates

that constructing a smal l building of 2000 square feet will

cost about S 100,000. Although he can use some of the metalcutting

and -bending equipment that he already has, another

$30,000 is required to obtain the equipment required to

move to commercial production of the Ladder Rail. Dan also

thinks that he will need a truck to haul inventory to the plant

and to deliver the finished product to purchasers. The estimated

cost for a good used truck is $30,000. Initial inventory

of aluminum is estimated at S 10,000. The financing requirements

total S 170,000 (Figure 3-A).

Armed with his business plan and his estimate of startup

costs, Dan goes to his local bank to obtain the required

financing. He is surprised that his banker is less than

enthusiastic about his proposal. His banker's response is

clear. "First, you need more equity than this before I could

advance a loan to you. Second, you will need more detail on

your costs. Third, I will need some indication that your business

has the ability to make the loan payments." With his

banker's words ringing in his ears, Dan is determined to

show how this business could repay a loan. He goes home

and starts to work up a proposed income statement, shown

in Figure 3-B.

FIGURE 3-A

Building

Equipment

Truck

Inventory

Ladder Rail Start-up Costs

$100,000

30,000

30,000

10,000

•

FIGURE 3-B Ladder Rail Income Statement

Revenue: 5000 units at $40

Cost of goods sold: 5000 units at $1 0

Wages (Sid: $50,000; 2 workers

at $30,000 each)

Utilities and phone

Net income

$200,000

50,000

110,000

15,000

$ 15,000

When Dan takes this statement to the banker, he is still told

that more work needs to be done. Dan goes home to Suzie

feeling pretty discouraged and is not sure what to do next.

Suzie and Dan decide to spend some time researching

other potential sources of money online. Both are surprised

to learn about the number of angel investors and angel

groups in their region. Suzie thinks pursuing angel support

for their business would be ideal as the couple will not be

burdened with interest costs, which are associated with traditional

bank financing. Furthermore, if the business fails, they

will likely lose less of their own money. Dan is not as excited

about angel investors as Suzie is. He argues with her that he

wants to be his own boss; business angels would want to

inflwence his decisions, and starting the company is something

they can do on their own. Dan also thinks that if he sells

equity in his business, he could be giving up millions in longterm

profits if the company succeeds nationally and then

globally.

Questions

1. What items have been overlooked by Dan in both the

start-up costs and the income statements for the

Ladder Rail?

2. What additional statements would the banker likely

require?

3. Do you think Dan should consider other forms of capital

like equity? Why, or why not?

4. What advantages of angel financing is Dan missing out

on in his assessment of this specific type of an investor?

How might Suzie persuade him to change his mind?

5. Would crowd-funding be a good idea for Dan to pursue?

What are some of the potential advantages and disadvantages

of this strategy7

Answer 1

1. What items have been overlooked by Dan in both the start-up costs and the income statements for the Ladder Rail?

Some items overlooked by Dan in start-up cost are mentioned below:

Advertising and Promotions: Dan needs to take into consideration cost for promoting the products and getting to customers.

Legal Expenses: Dan also need to investigate things such as registering the company, designing logo and establishment of legal structure.

Insurance fees: Insurance to cover equipment, properties and employees also need to be taken care of.

Some items overlooked by Dan in income statements are mentioned below:

Revenue Streams: Additional revenue can be generated from the sale of scraps.

Fixed Cost: A few of the fixed cost such as financing cost, insurance premium, maintenance cost etc.

Variable Cost: A few o the variable cost need to be considered are transportation and delivery cost.

2. What additional statements would the banker likely require?

Detailed Project Report: This need to include the business model, technical feasibility, management team etc.

Financial Projection: This need to cover the growth of business i.e. year wise estimated sales, profit, growth rate, Breakeven year etc.

Existing Position: How Den plans to finance the project i.e. Debt Equity ratio, the source of existing fund etc.

3. Do you think Dan should consider other forms of capital like equity? Why, or why not?

There are other options available to finance the business apart form Debt. Equity is one major form of financing.

Advantage Equity Financing:

1.     No need to worry about interest payments and whole funding can be used for business.

2.     Options for follow up funding

3.     Investors can be assets in terms of network, experience and skills

Disadvantage of Equity Financing:

1.     Need to give some equity in the business

2.     Investors might influence decisions and thus reduced power

3.     Time-consuming and challenging to find the right investors.

Based on the above points and current circumstances, Den should investigate the equity financing to avoid banks and win over limited initial funds that they have.

4. What advantages of angel financing is Dan missing out on in his assessment of this specific type of an investor? How might Suzie persuade him to change his mind?

Apart from the transfer of risk as Den don’t need to repay in case of loss, Angel investors also bring a lot of knowledge to the table. They see the big picture and tale long-term view in the business as it is an opportunity for them as well.

Den could also negotiate well and draft the agreement in a favourable way as Angel investors are flexible in terms of the agreement in most of the case. Den could also expect to follow up funding and additional funding through word of mouth.

Suzie should persuade a great deal to change Den’s mind and consider angel investing as an option as it mitigates risk as well as brings funding and skills.

5. Would crowd-funding be a good idea for Dan to pursue? What are some of the potential advantages and disadvantages of this strategy?

Advantages: Some of the benefits are as follows:

1. The initial crowd funders could be the first one to test your idea.
2. It could be fast trough online systems
3. Ideal platform to get feedback and a lot if expert advice.
4. No initial cost for raising crowdfunding.

Disadvantages: Some of the negatives are as follows:

1. Need to protect business through the appropriate mechanism such as patents etc.
2. Could led to too much giving away
3. Too much risk on unsuccessful projects
4. No funding in case one reaches the target funding level

Based on the above, Den could look at this method, however, it could be a long-drawn process.