Welcome to Shark Tank
You have a great idea about a new business opportunity. You’ve run the numbers and are confident that with an initial investment of $500,000, you can turn a profit in three years and generate $150,000 in operating income per year. But you realize there are no guarantees. Further, you anticipate that there is at least a 50/50 chance the economy will enter a recession within the next two years.
- What factors will be most important in determining if you want to fund your venture through equity or take a loan for the $500,000?
- If you meet all your projections, will you be happier in five years that you used equity to fund the venture or debt? Why?
- If the company goes bankrupt in five years, would you have a different answer? Why?
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.
1st person to respond to
Csherri
Welcome to Shark Tank
You have a great idea about a new business opportunity. You’ve run the numbers and are confident that with an initial investment of $500,000, you can turn a profit in three years and generate $150,000 in operating income per year. But you realize there are no guarantees. Further, you anticipate that there is at least a 50/50 chance the economy will enter a recession within the next two years.
- What factors will be most important in determining if you want to fund your venture through equity or take a loan for the $500,000?
- With a loan, you maintain control over your business. With equity investors, you lose control over your business.
- With a loan, lenders are not entitled to your business profits. With equity investors, you can be voted out of the company by the investors. Also, investors receive portions of business profits, which takes away from valuable company profits that could be reinvested into the company
- With a loan, you only answer to yourself. With equity investors, they are co-owners, and you have to inform them of all aspects of the business because, with not doing so, they can sue you (1).
- If you meet all your projections, will you be happier in five years that you used equity to fund the venture or debt? Why?
- If I meet all my projections, I would be happier with utilizing a loan because I would have sole control over my business. My profits would not have to be shared with investors, and I will not have to worry about losing my business because of being voted out due to not meeting my projections.
- If the company goes bankrupt in five years, would you have a different answer? Why?
- If the company goes bankrupt in five years, I would not have a different answer because, with a loan, I would remain the owner of the company and have the chance to reorganize and bounce back from it. With equity investors, I would more than likely be voted out and someone else would be allowed to take over my company (2).
References
- https://smallbusiness.findlaw.com/starting-a-business/financing-a-small-business-loans-vs-equity-investment.html
- https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics#:~:text=A%20case%20filed%20under%20chapter,court%20approval%2C%20borrow%20new%20money.
2nd person to respond to
Deborah
Hello JP and Classmates:
Welcome to Shark Tank
You have a great idea about a new business opportunity. You’ve run the numbers and are confident that with an initial investment of $500,000, you can turn a profit in three years and generate $150,000 in operating income per year. But you realize there are no guarantees. Further, you anticipate that there is at least a 50/50 chance the economy will enter a recession within the next two years.
- What factors will be most important in determining if you want to fund your venture through equity or take a loan for the $500,000?
- How much capital: refers to the ratio of owner’s equity to the firm’s total liabilities (or leverage). While there are exceptions for certain industries, in most cases a business should have no more than $3 or $4 in liabilities (mostly debts and payables) for every dollar in equity to qualify for conventional financing.
- Business Risk: new business owner security and fraud risk. …
- Compliance risk. …
- Operational risk. …
- Financial or economic risk. …
- Reputational risk.
- Assets available: This company is a started-up business.
- Control power: A means by which we gain reasonable assurance that a business will operate as planned, financial results are fairly reported, and it complies with laws and regulations.
- If you meet all your projections, will you be happier in five years that you used equity to fund the venture or debt? Why?
If I meet all of my projections, I would be very happy for me and the business, and I would have total control of my business and how it is run and don’t have to share with my investors and don’t worry about losing my business or have to step down from my business.
- If the company goes bankrupt in five years, would you have a different answer? Why?
If the company goes bankrupt in five years, I would be very upset that this has taken place, but also I would have to do everything in my power to stay calm and take deep breaths.
- Under Chapter 11 bankruptcy, a small business with sufficient cash flow can stay open and make smaller monthly payments to creditors.
- A company without cash flow can use Chapter 7 bankruptcy to close efficiently and transparently.
- In some instances, a sole proprietor can keep a business open by filing a Chapter 13 bankruptcy, or even a Chapter 7 if the company provides services only.
Deborah
References:
