Financing an Expansion
Financing an Expansion
I started my online women’s boutique out of my home with my own savings. Focused on women clothing of all sizes. After 12 long years I can say my business has become very successful and I now have physical locations all over the region. Starting out online and then actually being able to open a store is a huge accomplishment. The stores are in the areas that have the must target market. So, even though my business has already expanded I want to expand my business bigger. I would like to purchase one of my competitors to try and expand more. The online retailor I am interested in is Fashion Nova. The reason I picked this competitor is because it is a successful online store that sells both women and men clothing. With this purchase it was expand my market to men. It will also give my current market more products because this company also sells footwear and accessories. But I will need to find out the value of this company first.
The best option I believe to value this new business venture would be the cash flow-based valuation. This valuation shows the future cash flow of the business and how much of it would be free to pay back investors (Leach & Melicher, 2009). I will also want to make sure the debt does not outweigh the income. If the debt is high, I might not want to get into a business that is not making a profit. With this valuation I would be able to look at the balance sheet, cash flow statement, and income statement. Having this information available I will be able to see if the current numbers and a projection of the future. The market value of the company is $442,000.
MV (Total Assets – Total Liabilities) = Equity
MV (2,204,000-1,762,000) =442,000
Not only do I need to look at the new company’s value, but I also must look at my own business and how I can determine I can afford the new venture. Best place to start is looking at my cash flow statement. Looking at exactly how much money is coming in and out will show exactly how much is there. This statement will also show how much of this cash is free as well. Next thing to look at that will be helpful would be looking at the balance sheet. This sheet will show me all the assets. Knowing what is owned or owed is important. Another thing the balance sheet shows is the liabilities. If we owe more than what is owned this could be a downfall and not have the best interest in trying to purchase a new business.
Ratios are another good tool to see if you can afford a new venture. The current ratio provides the information if I can meet my short-term financials. Efficiency ratios show how long it takes to sell a product and how long it takes to received payment for the product. Making sure I am financially stable to take on another business is crucial. I don’t want to buy a new venture and have my original one start to fail. Looking at all my financial statements is important and can give me an overview if I can really afford of buying a new venture.
Once I look over all my financial documents and I determine I can afford another business I will start looking to options for capital. To purchase this new business, I will need an additional $100 million. There are many options within the debt market and equity market to obtain this extra capital. The debt market has a few options receiving a loan from a bank, loan from an investor or a bond. The option to get capital from debt marketing would be obtaining a loan. With obtaining a loan I will need to create a new business plan explaining why I need the money and how I will be using it. A loan from a financial institution I will need a good business plan and good credit. I will have to see if I get approved for the loan and exactly how much they are willing to give me. The bank will determine how I must pay off the loan and I will also have to pay interest. The faster you pay off a loan the less interest you will have to pay. Now looking for investors is a little different. I would still have to have a good business plan but some investors what part equity. So, getting a loan from an investor can make my lose equity in my company and still must pay interest as well. I personally would like to try a bank loan first over an investor and the reason why is because I will be able to keep 100% equity in my company. In the equity market I can have my company become publicly traded and sell stocks of my company to investors for capital. Investors will give capital because when the company does well the stocks will go up and they will make money.
Looking at all the options above I believe there are two good options for getting the $100 million. The first option is obtaining a loan from a bank. I would like to try to obtain as much as I can from then before moving on my second option. The second option is to obtain the rest of the money from an investor. The reason why I will be okay with letting someone have equity in my company is because with the expansion I can use more help. When looking for an investor I will have to make sure I am picking the right one. This investor will need to be able to keep the business growing.
Being able to purchase this new company will help take mine to the next level. Not only does it expand my market, but it will also expand my inventory. I will be able to do not just clothing but footwear and accessories as well. Starting this process can take a while but it will be worth it in the end.
Leach, J., & Melicher, R. W. (2009). Entrepreneurial Finance (4th ed.). Mason, OH: South-Western Cengage Learning.
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