Unit 7 Assignment

DIFFERENT TYPES OF BUSINESS

FINANCING
Case study on Great Service Cleaning and
Maintenance Company

Author UOP MBA Student

Unit 7 Assignment

Many companies seek means to provide the much-needed finances to grow their businesses.

The financing models could be through debt financing, share ownership, private buy-out,

public debt or public common stock. This paper will look at each alternative, highlighting the

pros and cons of each. The paper will also look at the best alternative for Great Service

Cleaning and Maintenance Company which requires a capital infusion of $200,000 as the

case study

Private Debt financing

Private debt financing occurs when a firm or individual raises money from private sources to

fund operations, make an acquisition, or finance a project. The private investor(s) will lend

the money in exchange for bonds, bills, or notes issued by the borrower. (familyoffices.com).

This kind of financing is appreciated by many small, medium sized business for their growth

because it eliminates the need to surrender equity to the outside investors. Other reasons for

this kind of borrowing is low borrowing costs, financial certainty because interest rate and

dates of payments are set. Tax advantage because the amount you pay in interest is tax

deductible, effectively reducing your net obligation (www.thehartford.com), the cons for this

kind of financing is that there are Qualification requirements. You need a good enough credit

rating to receive financing. You also need to have Collateral which must be provided to the

lender, and this means that should put some business assets at potential risk. You might also

be asked to personally guarantee the loan, potentially putting your own assets at risk

(www.thehartford.com) For Great Service Cleaning and Maintenance Company going this

route will require them to provide the collaterals such as the buildings, however the

ownership of the company will still be returned by them unless they fail to pay the debt

Share ownership from Private investors

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In this financing model, you seek the investors who will invest in your company. in

exchange for the money they invest now, investors will receive a stake in your company and

its performance moving forward. The beginning point is to know the value of the company

and based on that valuation and the amount of money an investor gives you, they will own a

percentage of stock in your company, for which they will receive proportional compensation

once your company sells or goes public. (www.fundable.com). This kind of financing has got

its own advantages and is the best option if

1. You don’t have any collateral required for private debt financing

2. When you’re positioned for astronomical growth and you don’t seem to have the

needed capital.

3. When you are starting a high capital-intensive business proposal from the scratch.

Some negative aspect of this kind of financing is

1. Equity investors expect big rewards for big risks. The fact that investors have

pumped in the money in your business, they certainly expect big reward. They’re

exchanging more risk for more reward—a lot more—and they’re going to want to see

results

2. Equity narrows your options: Choosing the equity route significantly narrows your

options when it comes to the future of your company. Equity investors are interested

in one thing: liquidity. That means they won’t be satisfied with a cut of your profits

each year. Once you’ve accepted their money, they will expect that endgame for your

business is either sale or IPO ( www.fundable.com)

3. It takes time to raise the equity capital. Perhaps the minimum expected is 3 to

6months.
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For Great Service Cleaning and Maintenance Company, this option will put their stake in the

company at risk should they fail to operate at the profit desired by the investors.

Private Buy out.

A buyout is the acquisition of a controlling interest in a company – and is used synonymously

with acquisition.(Kenton July, 2018). By acquisition of controlling interest means that one

party buys all or the majority of a company’s shares(at least 51%) in order to gain control of

the target company.( corporatefinanceinstitute.com) This can either be management buyout if

the management of the firm buys the stake or leverage buyout if debts are used to fund the

buyout. The pros or advantages of Private buyout are

1. Efficiency. A buyout may get rid of any areas of service or product duplication in

businesses. (corporatefinanceinstitute.com). This can result in Operational efficiency

by reduced operation costs and can lead to profitability.

2. Reduced Competition if the company buys its competitor resulting into profitability.

On the other hand, buyout disadvantages are

1. Increased debt. The acquiring company may need to borrow money to finance the

purchase of the new company (corporatefinanceinstitute.com). This can also mean

getting on board all the liabilities of the other company being bought.

2. Integration. Integration of the personnel and procedures of the two companies is going

to take time. Even though the two companies may be doing comparable things, they

may have corporate cultures that are opposite to each other

(corporatefinanceinstitute.com).

3. Managing the Current Owner’s Departure. Striking the right balance between letting

the new owners take the reins and ensuring that vital company information and
Unit 7 Assignment

contacts are not lost with the departure of the current owner

(www.sellingmybusiness.co.uk)

For Great Service Cleaning and Maintenance Company, just as explained this approach

immediately dilutes their control of the company and may not be able to make the decisions

of their own without stake holders involvement

Public debt or Corporate Bond

This is the financial obligation that allows the issuer to raise funds by promising to repay the

lender at a certain point in the future and in accordance with the terms of the contract. (Chen.

J). A company can issue a corporate bond and sell it to the investors and receive the

necessary funds that they need as long as they can show the company capabilities to pay the

investors’ money from their future operations earnings. This option will give a company

some advantage among them are that

1. Their shares will not be diluted. The shareholding will be returned among the family

members

2. Corporate bonds generally come with the fixed -rate interest hence they will provide

future financial stability for Constantine Grocery and shield the business against

variable interests’ rate or economical changes

3. Corporate bond will enable Constantine Grocery to retain more cash in the business -

because the redemption date for bonds can be several years after the issue date.

(www.nibusinessinfo.co.uk)

However there are some disadvantages that the Company need to be aware of if they go this

route, among them are

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1. regular interest payments to bondholders - though interest may be fixed, the interest

will usually have to be paid even if they make a loss,

2. The potential for the business' share value to be reduced if the profits decline - this is

because bond interest payments take precedence over dividends.

3. Bondholder restrictions - because investors are locking up their money for a

potentially long period of time, they can impose certain covenants or undertakings on

your business operations and financial performance to limit their risk.

(www.nibusinessinfo.co.uk)

Public common stock

This is where a Company which is a private company will list its company on the stock

exchange and sell some of its shares to the public. The first implication to this approach is the

dilution of Shares. The Company will no longer be a privately-owned business, but it will be

a public owned company. However, the better side of this approach is that Issuing common

stock in the financial markets is an alternative to issuing debt. Rather than adding more debt

to a company's balance sheet, which is a financial statement, and budgeting for the servicing

of debt, a company can take a less expensive route and issue common stock. With stock, an

organization does not need to make obligatory interest payments to investors and instead can

make discretionary dividend payments when it has extra cash (Terzo. G 2018). If the

Company has to sell Common shares as a way to raise the needed capital, then they have to

through the Initial Public Offering (IPO) process.

Coming back to the company in question Great Service Cleaning and Maintenance Company.

If this company manages to get the $200,000 by using which ever financing model, then this

company financial outlook will look positive in the initial stages. For example, suppose the

company sold common stock to raise these funds. Then key financial KPIs like Profitability
Unit 7 Assignment

measure, Short-term liquidity as well as long term solvent measure will improve. This

amount will be treated cash inflow as well as assets in cash form. Therefore Gross margin

ratio will improve from 23% to 24%, (2, 396,900/ 9,900,000). The profit margins will move

from 9% to 10%, While Return on asset will jump from 13% to 17%. In terms of short term

liquidity, the company will be at 1.64 to 1 from the 1.47 to 1 that we calculated in unit 1. The

long-term solvency measures the debt to asset ratio will from 63% to 61%. All these figures

show the impact of injecting in, $200,000 in this business and in my view Common stock is

the best way for this business

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REFFERENCE

The Initial Public Offering (IPO) Process retrieved from

https://www.mergersandinquisitions.com/

What is the IPO Process? Retrieved from https://corporatefinanceinstitute.com

Geri Terzo, 2018, Pros & Cons of Issuing Common Stock retrieved from
https://smallbusiness.chron.com

Raise long-term funding through debt capital markets retrieved on 22nd December 2018 from
https://www.nibusinessinfo.co.uk

The Types of Investor funding retrieved on 1st January 2019 from https://www.fundable.com

What is a Buyout? Retrieved on 1st January 2019 from https://corporatefinanceinstitute.com

Advantages and Disadvantages of a Management Buyout Retrieved on 1st January 2019 from
https://www.sellingmybusiness.co.uk
Advantages vs. Disadvantages of Debt Financing Retrieved on 1st January 2019 from
https://www.thehartford.com
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa
3.0. Chapter 13
Private Debt Financing Retrieved on 1st January 2019 from https://familyoffices.com
Unit 7 Assignment