Question

Alvin Einstein is what is often called a “serial entrepreneur.” In the past 17 years he has owned nine businesses including a commercial laundry, two restaurants, a paving company, and a lumber yard. Alvin has done quite well, turning a $1.5 million trust fund that he received when he celebrated his 25th birthday into nearly $13 million. He recently came across a new business that appeals to him: The Dim Bulb Company. The Dim Bulb Company is a lighting equipment firm that specializes in manufacturing specialty items such as low-light and cool operating bulbs, and novelty Christmas tree lights in various shapes, including cows and horses. The company has existed for 23 years and has always been owned by the Light brothers, Hyman and Gray, who were generally referred to as High Beam and Low Beam. The Light brothers were ready to retire and wanted to sell their business. The company had revenues of $30 million and Operating Cash Flow of $6 million. The Light brothers felt the business was worth $30 million and were unwilling to give a buyer terms so that part of the purchase price could be paid over time. Alvin is ready to commit half his fortune, or about $7 million, to the purchase and now needs a financial plan to raise the other $23 million. He realizes he has several options: • Alvin’s family is quite wealthy and probably would finance $10 million. Unlike many family investors, they only want to do the deal on competitive business terms that any private angel investor or private company would accept.

• The Dim Bulb Company owns a building and land at their Florida factory that is worth $5 million. Alvin’s bank has said they would lend him $4 million against the building and another $15 million based on the company’s profitability. bankable business plans for entrepreneurial ventures 190 • Dim Bulb recently began subcontracting manufacturing to several foreign companies and Alvin thinks that one or more of the subcontractors might be interested in investing in Dim Bulb.

• A venture capital group with several large investments in the lighting industry is interested in buying 80% of the equity and allowing Alvin to purchase the other 20%, but they want to put as much debt on the company as possible before layering in the equity investment. The Light brothers want a proposal within two weeks and Alvin promised them one. Now he has to develop a financial plan.

Case Questions: 1. What are Alvin’s financing options?

2. From Alvin’s point of view, what are the pluses and minuses of each option?

3. How does the option of foreign outsourcing change Alvin’s options?

4. Which option would you recommend to Alvin and why?

Answer 1

2) in the first option as the family gives the finance of $10 million he will need to pay only less interest or sometimes they would give the money for no interest.

in the second option the bank can lend him a total of $19 million he can put up to $7 million making a total of $26 million he can negotiate with the seller or he now need to find only $4 million to buy it

in third case if the subcontractors becomes the partners then they would charge only a reduced amount from their company and hence the profit would increase and he can raise amount without interest

in the fourth case if the venture capital group purchases 80% and allow Alvin to purchase 20% then he need to raise only 6 million dollars which he already has in his hands

3) If he took the 4 th option then the Venture capital group will be the majority shareholder as they own more than 50% of company i.e 80%of company so most of the profits will go,to them and the can take decisions of their own to implement in the company

4) i would recommend option 1 because he can raise 10 million dollars without interest or at a lower rate than in the market.