Who's my group?
#3: A. Castro, M. González, A. Manzano, J. Coral, J. Casas
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July 7, 2009
'You're here to be free' - Prof. Aguilar
'The most important asset that any human being has is time' (prof. Aguilar); it's continously dimished; it's what one sales for a pay check when one is an employee; it shouldn't be wasted.
Pattents on technology and engineering are an indication of the level of innovation of a country. It's a driver of economical development.
Main line entrepreneurship: When one quits one's job to start a venture.
Sideline entrepreneurship: When one starts a business aside of one's job, and when the personal business starts to grow one quits being an employee.
Oppotunity Recognition
Ideas has no value by themselves. Ideas have to be realistic, have to respond to some customer's needs; have to be implemented to become any valuable venture.
There are three terms to opportunity recognition:
1.- Market Demand:
If there is demand for a specific need, and you can identify who are the potential customers, there's an existing demand. Alternatively, you can create demand (i.e. Microsoft operating systems, the invention of Copy Machine, etc.)
2.- Market Size and Structure
The way markets are structured. This considers the people, the industries that comform the surrounding environment, etc.
3.- Margin Analysis
Gross Sales
Less Cost of Goods Sold (COGS)
Less Fixed and Variable costs
Equals EBITDA = NOI (Net Operating Income)
Exit Strategy
Options include:
1.- Closure
This means to close and loose all the value built over the existence of the venture.
2.- Sell:
a.-To a privatly help company
This includes that the acquiror makes the entreprenuer to sign a non-competition agreement, while the may also make you stay at the management for a few years.
Also when you sale you may want to be payed in cash for you company; Payments in stock of privately help companies are not easy to valuate.
b.-To a publicly traded company
In the U.S. the security exchange commision may make you get Letter stock, which can't be sold for at least two years. A possibility is to hedge the stock (taking the risk out), where a hedging company guarantees that they'll buy your stock at not less than certain amount, but at no more than other certain amount (if stock price rises above the top amount, the hedging company keeps the difference).
c.-Through a Management Buy Out
When management buys the company obtaining credit from a bank, the creditors, and/or the seller.
d.- Employee Stock Ownership Plan - ESOP
Employees buy the company paying with their salaries. It usually takes long time, as employees gradually acquire the whole company.
d. - To do an Initial Public Offer - IPO
You have to be big for this (in the U.S. at least as 30 million yearly EBITDA), so that the process' cost is worthed.
New Venture Creation
To create a new venture, on must put togheter three things: An opportunity, a team, and the economical resources.
The opportunity:
As discussed above.
The team:
Once you''ve identified and oppotunity, one must build a team. One wants people that thinks differently; One wants people who has:
Honesty
Ability
Work Ethics
The Resources:
Can be acquired through debt or equity.
The idea with this is to tie the least possible capital to assets.
What ever financing one gets would be for fixed assets, that is, for equipment.
Publicly traded companies rise money through public offerings of additional stock, case in which stockholders may see their share diluted, although the value of their stock remains the same (this is because the company is taking the cash from the new stock sale into its balance sheet; It doesn't loose any value per share)
Project Management
1.- Planning
Answers the question: What shall we do?
2.- Programming or Scheduling
When shall we do it?
3.- Budgeting
How much will it cost?
4.- Financing
How am I going to pay for it?
5.- Execution
Do it!
6.- Feedback
Are we doing it as we planned?
If Yes, go to #7, else, go to #1
7.- Control
Keep it going as you planned.
Capital Assets Pricing Model (CAPM)
This model comes out of Chicago University (where the Chicago Boys, and Milton Freedman came from)
http://en.wikipedia.org/wiki/Capital_asset_pricing_model
Considering any variation (risk) there is an expected return rate. Any security that throws a higher return rate than the expected considering its risk is undervaluated, and is likely to increase its price. Positive arbitrage apply in this case, so buying securities to be sold later should be a good business. In the opposite case, where a negative arbitrage occurs, selling short is a profitable (but risky) business.
Porter Model of Industry Profitability
Barriers to entry
(the more of this,
the more profitability)
|
|
Bargaining | Bargaining
Power of | Power of
Suppliers | Customers
(the more of this ------- Existing Competition -------------- (the higher this is
the lower the (the more of this, the lower the lower the
profitability) the profitability) profitability)
|
|
|
Product Differenciation
(The higher, the higher the
profitability)
(the more of this,
the more profitability)
|
|
Bargaining | Bargaining
Power of | Power of
Suppliers | Customers
(the more of this ------- Existing Competition -------------- (the higher this is
the lower the (the more of this, the lower the lower the
profitability) the profitability) profitability)
|
|
|
Product Differenciation
(The higher, the higher the
profitability)
Market Segmentation (upon Innovation and Growth)
(insert here professor's graph)
Model for successful company (Perfect Entrepreneur model company)
- Low production cost
- High selling price
- Fast collection of receivables
- Slow payment of payables
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SIDE NOTES
Essence of Organizational Behavior
'What get measured, gets paid attention to' - Prof. Aguilar
Psychologists say that what gets rewarded gets done.
Intrapreneurial: When you get entreprenurial within the company you work for.
Three T's for Success
Talent
Technology
Tolerance
Acquiring a company
- Buying stock (a stock sale), when one buys assets and liabilities
- Buying Assets only.
Definition of Risk:
Quantified uncertainty
In a scale of zero to one, zero would be the certainty of non-occurrence, whereas one would be certainty of occurrence.
The proxy for risk is variability (of the EBITDA). It can be mesasured in terms of mean and standard deviation.
Solvency:
When assets are larger than liabilities.
Liquidity:
Cash flow. Simply that. The ability of converting an asset into another asset or cash.
One can go bank rupt not for having more liabilities than assets but for not having liquidity.
The proxy for liquidity is standardization. The more standard an asset is, the more liquid it is.
Risk-free investment
US Treasury Bonds
1.- Bills - up to 3 years in maturity; $10.000 face value
2.- Notes - up to 10 years in maturity; $5.000 face value
3.- Bonds - up to 30 years in maturity; $1.000 face value
Usually, even though T-bonds are risk free, their interest rate are higher as they have a longer maturity time. the difference between the shot term and long term papers is called inflation premium, and it corresponds to the expected inflation applied to those papers.
Notes on macroeconomic stability
Inflation can be foreseen by watching inventory levels. When inventory levels (at all industries in general) consumers are buying less, so production will have to stop at any time, so will the raw materials sales, and so on through all value chains. This generates recession and therefore deflation. The opposite applies to inflation.
July 8, 2009
Terminal Valuation Method
TV = {EBITDA (At year N+1)} / {Cap. Rate % - Growth %}
In this formula, growth rate is discounted from capitalization rate, so that growth is taken into account. Otherway, the growth of the company during the last holding year wouldn't be considered. A conservative buyer may want to valuate the company without considering growth during last year.
It is important to note that only a stable growth rate may be considered, as it is taken as a forecast of growth for the upcoming year. Unstable growth rates, as well as initial growths of the first years of a venture, don't make sense as a growth forecast.
Capitalization Rate equals EBITDA divided by Price
There are three methods to give a terminal valuation of a company.
1.- Component Method
Rate of return equals Return ON investment + Return OF investment (see professor's notes). It is similar to calculate de return rate of investment using EBITDA but adding Depreciation.
Return On investment splits into three, the risk free rate + a inflation premium + a business risk rate
2.- Extraction from the Market - (No Growth)
This method implies to take information from the market, and use as capitalization rates that apply for similar companies (an average, or a rate of a similar EBITDA company). The problem with this is the difficulty to get the data.
This is supposed to be the most reliable method, if information can be gathered.
3.- Band of Investment
The value of a company is the value of the equity + value of the debt
Integrated Financial Statements
Sales -> Profit & Loss -> Balance Sheet -> Cash Flow
A business plan should have a holding period of 5 to 10 years.
1rst year -> Monthly
2nd-4th year -> Quarterly
4th-END -> Annualy
Proforma Cash Flow (this means, in the future Cash Flow)
Through this EBITDA can be calculated, so terminal value may be found.
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SIDE NOTES
It's important to develop disciplines of:
Emotional
Physical
Intelectual
Real State
Real state is the land, the improvements to the land and the improvements on the land.
Real property is the bindle of rights that attaches to the real state (realty)
- Acquisition
- Right to use and enjoyment -> this right may be transferred through a leasehold/rent
- Alienation -> liens (mortgages)
- Exclusion -> keep people out of your property - Non-trespassing
- Dispossition
Police Power of the state
- Zoning (like 'Plan de Ordenamiento Territorial')
- Property Taxation
- Escheat
Marketing
'Don't try to market what you can produce; Produce what you can market' - prof. Aguilar
July 9, 2009
Debt Vehicles
Evidenced by the Mortgage and Note; The Note is the evidence of indebtness; The mortgage is the evidence of collateral on the debt. They are recorded in the court house (public record)
The order in the chronology of recordation in public records establishes the seniority of a claim.
There is obligation to service debt (guaranty), with an amount and timming. In case of default, lender has foreclosure rights. If there is a deficiency, in auction proceeds. A deficiency judgement ensues if personally guaranteed (in personam). No deficiency judgement is loan is non-recourse, therefore the lender is a beneficial owner.
Equity vehicles
Evidenced by title (real estate) or security interest (shares); At most preferred return, not guaranteed. No foreclosure rights for equity investor, therefore, the equity investor is a residual owner. The vehicles for equity are (nine):
- Propietorship - you own a property on your own name (Individual ownership); Individual tax payer and full liability
- Concurrent ownership - Two or more individuals own vehicle; Individual tax payer and full liability
- General partnership - Individual taxation, full liability
- Joint venture - also called strategic alliances
- C Corporation - Constituted under subchapter C of Internal Revenue Code. Corporation is the tax paying entity and there is no liability to shareholders beyond capital contribution. Dividends are not deductible to neither the corporation nor the shareholders. Shareholders manage the company through a board of directors, which conducts corporate management. It has indefinite life. In this kind of corporations there is free transferability of ownership, although this can be restricted by a shareholder's agreement)
- S Corporation - Does not pay federal taxes; Individual shareholders pay taxes (so there si no double taxation). Limited Liability.
- Limited Liability Company (LLC) - It has members instead of shareholders. Individual pay taxes, and there is limited liability. Does not pay corporate franchise tax (in Lousiana).
- Limited Partnership - Individual is the tax payer, and there is limited liability to limited partners; There is a General Partner who is liable. This kind of vehicle is not used anymore.
- Real Estate Investment Trust - Limited liability, and individuals tax payer.
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SIDE NOTES
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'Only if I can handle failure will I take the risk which is necessary to succed' - prof. Aguilar
'If you can lease it, don't buy it; If you can rent it, don't lease it; If you can't borrow it don't rent it' - Entrepreneur credo - prof. Aguilar
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