MODULE 5

Family Business

Definition- Family business

It is defined in terms when there is ownership control by members of a family, strategic influence of a family in the management of the firm, concern for family relationship and the dream continuity across generations. Family firm is a corporation that is entirely owned and managed by the member of a single family.

Another definition
A business in which one or more members of one or more families have a significant ownership interest and significant commitments towards the business. In some countries, many of the largest publicly listed firms world wide are FAMILY OWNED Examples- Wal-Mart (USA), The Gap (USA), -Samsung group(South Korea) -LOreal ( France), IKEA (Sweden) -Tata Group ( India), Mc Cain Foods ( Canada) -Fiat Group ( Italy), Grupo Modelo ( Mexico)

Characteristics of Family businesses in India FB are loyal to the principles and ideals of the founder. Family relationship is the most imp factor in determination of the position a person holds in the business. Family influences the business and business environment influences the family. Family members who are not contributing to the business are also included in the board of directors. It provides true reflection of the values of their founders and of the people who pass them on from generation to generation.

Contd
Succession is the final test for family business. Most of the family businesses face unique management challenges because of the differences in attitudes and aspirations of the family. It has been observed that just 13 % of the family business survive till 3rd generation and only 4 % go beyond 4th generation. The single minded dedication of the CEO and the family ensures that the family- owned business survives through the toughest times.

Importance of Family Business

FB are the engines that drive socio-economic development and wealth creation around the world. FBs are centuries old and have consistently contributed towards significant wealth creation and nation building. FB contribute all over the globe more than half of the GDP, employment and account for a big proportion of market capitalization. FB not only contribute to the economic development but also in Philanthropy like in several areas- Education, Environment, Health , Culture, Welfare of victims of Natural Calamities and Heritage Conservation.

Estimates show the following facts about contribution of family businesses

About 85% of businesses in European Union & 90% of US businesses are family controlled. Worldwide family businesses account for approx 75% of the top 100 companies. In Holland, small family businesses represent 75% of all companies. In US FB generate 60% of all employment. Of Italys top 100 companies 43 are family owned. In India 95% of the registered firms are FB which include Tatas , Birlas , Ambanis, Singhanias, Chidambrams, Kirloskars , Goenkas etc.

Characteristics of family firms and professional firms

1. 2. 3. 4. 5. 6. 7. Types of Market- Professional firms(PF) perform very well in emerging markets than Family firms. Age of the firm- Family firms are younger or middle aged while PF are older. Size of the firm- Family firms are smaller or medium sized but PF are comparatively larger in size. Category of entrepreneurship- The first generation firms accounted for 80% of family firms,1/3rd were professional firms and 10% were foreign firms. Ownership of firms- 61% of all firms were closely held by families, 32% widely held and 8% were foreign equity owned. Legal ownership- Very large number of family firms were privately owned whereas the PFs were public limited. Consistency of sales growth- 64% Professional firms had consistent sales growth of over 20% for last 3 years and remaining skewed towards the family firm. Group affliation of the firm- Predominantly professional firms were affiliates of Indian business group or foreign subsidiary, while family firms more often stand alone companies even though they have multiple businesses.

8.

Types of family business

 Sole proprietorship Partnerships Limited Liability company Holding companies Family controlled companies Various forms of ownership can be Sole proprietorship Partnership Joint stock company Co-0perative organization

Sole Proprietorship
The individual form of business organisation is an organisation at the head which stands an individual as the one who is responsible who directs its operations and he alone runs the risk of failure.

Features of Sole Proprietorship

Individual ownership. Unlimited liabilities. Free from legal formalities. Limited scope of operation. Personal Interest. Freedom to start and to end. Monopoly on profit. Business Secrecy.

Merits of Sole Proprietorship

Easy formation. Less expensive to establish. Least government interference. Complete control. Prompt decision. Business Secrets Feasibility. Tax benefits. Retention of profits. Personal interest.

Demerits of sole Proprietorship

Limited resources. Unlimited liability. Possibilities of wrong decisions. Limited ability. Lack of specialization. Uncertain existence.

Suitability of sole Proprietorship

1. 2. 3. 4. It is the best form of ownership in the following cases. Where business is on small scale. Where capital requirement is very small. Where promptness of decisions is very important. Where customers demand personal attention.

Partnership
As per Indian partnership act of 1932. Partnership is a relationship between who have agreed to share the profits of a business carried on by all or any of them acting for all.

Features
Plurality of persons. Contractual Relationship. Existence of business. Profit Motive. Principal Agent Relationship. Unlimited liability. Restriction on transfer of interest. Implied Agency.

Merit of Partnership
Easy formation. More financial resources. Collective decision making. Sharing of risk. Flexibility. Complementary skills. Credit Worthiness. Business Secrecy.

Demerit of Partnership
Unlimited liability. Uncertain existence. Limited funds. Transfer of share.

Suitability
1. 2. 3. 4. It is more appropriate if the business is of medium scale. It is suitable in the following cases. Where financial requirement is moderate. When business need persons with complementary skill. Where business is to be carried on a medium scale. Where collective decissions are required to be taken.

Joint Stock company

A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.

Features
An artificial person created by law. Separate legal entity. Perpetual succession. Common Seal. Limited liability. Representative management. Right to sue. Transferability of shares.

Merits of Joint Stock Company

Limited Liability. Diffused Risk. More financial resources. Transferability of ownership. Perpetual Existence. Economies of Scale. Professional Management. Capital formation.

Demerits of Joint Stock company

Difficulties in formation. Lack of personal interest. Difficult to maintain business secrets. Delay in decision making an execution. Excessive regulations.

Suitability of joint stock company

It is suitable for large scale org and the following cases :1. When financial requirement is more or business is to be carried on a very large scale. 2. When project is very risky and promoters are not prepared to bear the risk. 3. Where due to nature of business professional management is needed.

Co-operative organization
According to cooperative society Act 1912. Cooperative org is a society which has as its objectives in promotion of the interest of its members in accordance with the principles of cooperation. It is a voluntary association of individuals who join together on basis of equity for the promotion of their common economic or business interest.

Features
Voluntary association. Democratic management. Service motive. Open membership. Government Control. Limited liability.

Merits of Cooperative org

Economy in Cost. Democratic Management. Service motive. Government Regulations.

Demerits of cooperative org

Limited financial resources. Political interference. Lack of personal interest. Lack of professional management.

Suitability
Where members individually are not in a position to safeguard their interests. Where there is willingness amongst members to come together for the promotion of their common interests.

Impact of family owned business (FOB)

Let us analyse the reasons for disappearance of most of family owned businesses in 2nd or 3rd generation. Sole Proprietor as owners have little trust in anyone elses ability to make decisions. They dominate their children and other members of the family in the same manner as they dominate someone else. Proprietor dominate their children and keep power in their own hands which deteriorates their relationships as they become dependent and submissive. Family business under a control of Proprietor are hardly professionalized. Sibling rivalry and dispute resolution. Estate planning and succession planning. Clashes and differences between different generations.

Ten success principles for improving family business performance

1. Communication Most families with an intention to perpetuate their business follow this principle. They make conscious efforts to communicate with their kin as stake holders in the business as silence leaves room for different interpretation by others. 2. Trust The fundamental factor that bonds any relationship is the trust members have in each other. So they ensure complete transparency in what ever they do. 3. Codify conduct - Variation in attitudes behaviour and conduct among family members are often a source of friction. A set of guidelines should be followed to avoid feud.

4. Loose coupling Relationship often break up for want of breathing space among different units within a family. Business families should retain their separate family and business identities therefore they ensure that they have enough privacy within their joint family system. 5.Handle money carefully There are many disputes in business families which arise due to poor management of wealth. Money is a double edged sword, if handled carefully it serves you, otherwise it may leave you bleeding. 6. Professionalize the business- professionalization is an attitude. It helps in making business decisions, it functions irrespective of weather the business is managed by family members or by outsiders.

 7.Ownership clarity- Many families tend to get into trouble for want of clarity about who owns how much of what. While taxation is an one reason/excuse to have cross holding by family promoted investment organisations. A family level holding company model is the best structure to address this challenge. 8.Retirement and Succession- They are like the two sides of the same coin. Leaders who have spent all their life in business hesitate to retire, so they need career counseling on weather they should remain associated with the business or not.

9. Groom early Business leaders should groom their children to been good family member and business people. Families need to plan and spend quality time with children and tap outside resources appropriately to groom their children with the right qualities. 10.Leadership - It is critical everywhere, especially it is complex in family business. The leader should be one with humidity as a value besides all other qualities. Eldest is the best may not always stand true. They need to make a conscious choice to remain together built their family wealth.

MODULE -3
BUSINESS PLANNING PROCESS

Meaning of Business Plan

A Business Plan is a comprehensive set of guidelines for a new venture. It is a formal written expression of the entrepreneurial vision, describing the strategy as operations of the proposed venture. It may also be called a Loan Proposal when presented to banker for loan or Venture Plan when presented to a Venture Capitalist for Venture Financing. Business Plan is a way to look into the future in which planning serves as a bridge between the present and the future.

Elements of a Business Plan

Goals for the enterprise both short term and long term. A description of products and services offered. The market opportunity anticipated for them. An explanation of resources and means to be employed to achieve goals w.r.t competition. Thus , a well constructed business plan serves as a blue print to follow which, like any map, improves the users chances of reaching his or her destination.

Features of a Good Business Plan

It should be a honest plan with well supported information. A well written plan should clearly identify products, services, markets and the founders. It should be prepared in a quality manner. It should be complete and accurate. Language used should be clear, brief, concise and not abstract. The words like I think & I believe should be avoided. It should make clear and realistic financial projections. It should be prepared after clear detailed market research and detailed competitors research. It should describe key decision makers. It should end up with a thorough summary.

Advantages of a Business Plan (BP)

There are a number of advantages of a good and wellconstructed Business Plan. 1) Financial Map Every business needs finance right from the start up phase till its end. BP acts as a passport to sources of finance. Moreover, no bank or financial institution or a venture capitalist will give financial support to a venture or business which is without a business plan. 2) Confidence in Management The business plan acts as a guide, where they focus their ideas to achieve a particular target. It will give confidence to the management team and assure that they can achieve the goals set by them.

3. Dealing with conflicts- An Entrepreneur is potentially in

conflict with his personal demands and business demands. He may desire for wealth, good income, high esteem & more time for leisure and recreation while other hand, fulfillment of such desires is impeded by the demands of the organization. He may anticipate a period stability once the venture is off the ground. 4. Planning and Performance- There is a positive relation between the two. The firms who plan perform better and are likely to succeed than firms that dont plan. A comprehensive plan helps the entrepreneur to see where the trouble might come from and how to reduce its effects. An effective plan helps the entrepreneur to communicate the vision of the founders and to attract resources to the new venture.

5. A guide to decision making- The business plan sets goals and milestones for the new ventures. The plan can be referred to repeatedly to guide decisions of the firms managers and employees. when in doubt or conflict, consult the plan could be the motto of the new venture. A well drafted and readily available written plan shall foster cohesiveness because everyone can see the firms desired objectives and goals. 6. Revision of Business plan- If the business plan has been made, consulting it frequently, reviewing it and revising it periodically can improve ventures performance.

7. Errors are avoided- A well constructed business plan allows mistakes to be made only on paper rather than in the market place. An entrepreneur after preparing his business plan found that at the price he proposed charging for a new product he would never recover his over heads or break even point. To conclude, despite these many valuable benefits, thousands of would be entrepreneurs still attempt to start a venture without a business plan.

Ten Dos of a Business Plan

1. Prepare a complete business plan for any business you are considering. 2. Use the business plan templates furnished in each section. 3. Complete sections of business plan as you proceed through the course. 4. Research to find business plans of other entrepreneurs. 5. Package your business plan in an attractive kit as a selling tool. 6. Submit your business plan to experts like CAs in your intended business for their advice. 7. Spell out your strategies on how you intend to handle adversities. 8. Spell out the strengths and weaknesses of your management team. 9. Include a monthly one year cash flow projection. 10. Freely and frequently modify your business plans to account for changing conditions.

Ten Do Nots of a Business Plan

Dont be optimistic in estimating the future sales. Dont be pessimistic in estimating the future sales. Dont disregard or discount weaknesses in your business plan. Spell them out. 4. Dont stress long term projections. Just focus on your 1st year projections. 5. Dont depend entirely on the uniqueness of your business or the success of an invention. 6. Dont project yourself as someone you are not. Be brutally realistic. 7. Dont be everything to everybody. Highly focused specialists usually do best. 8. Dont proceed without adequate financial and accounting know-how. 9. Dont base your business plan on a wonderful concept. Test it first. 10. Never, Never, Never skip the step of preparing a business plan before starting. 1. 2. 3.

The Need of a Business Plan

Though a business plan may get outdated very fast, nevertheless , eager business owners should not rush into new ventures without a business plan. The business plan is a necessity because:1) A good plan ensures that certain key targets are met as it sets the course of a business over its life span. 2) It ensures business planning meetings with key people because that keeps your plan up-to-date. 3) Reviewal of business plan helps to achieve the objectives set by the owner. 4) It is better to assess progress every quarterly or half yearly if a well drafted plan has been made and followed. 5) The plan also shows direction and commitment to employees, customers and suppliers. 6) Defining the purpose of business in a business plan helps keeps the entrepreneur focussed, inspires employees and attracts customers .

7) It helps to focus ideas and serve as a feasibility study of business chances for success and growth. 8) The finished report serves as an operational tool to define possibilities. 9) It helps manage the business and prepare for success. 10) It is a strong communication tool for business as SWOT analysis can be made. 11) It serves as a financial proposal and should be accepted by most leaders. 12) It acts as a resume for the proposed business. The BP is like your calling card, while speaking to the banker or investor, the business plan will announce/outline who you are and what your proposal is?

Who should prepare the business plan ?

The owner of the business should frame the business plan. However, Consultants like Chartered Account can be hired to assist the entrepreneur in the process of formulating the business plan.

Business Plan Process

A thorough , complete and an effective business plan can be lengthy often 10-15 pages or even longer. It takes time and efforts yet not simple but essential. Every entrepreneur has his own ideas about a business plan.

Business plan process prerequsites

1.Title page 2.Table of contents 3.Executive Summary 4.Competition 5.Management Team 6.Capital Requirements

Major areas of a Business Plan

1.Title page- inclusive of - Company name with logo - Coloured picture of the product - Name of the key man in financing - Address - City, State - Phone number - E-mail - Company home page URL

2.Table of contents Executive summary 1-3 Details of executive management 3-3 Mission 3-4 The company 4-4 The business 5-6 Competition 6-6 Management team 6-7 Capital requirements 7-7 Financial projections 8-9 The market 9-10

3. Executive Summary- it is very important as it is the first section of the plan that every reader sees.

Details of executive summary

1. Mission Statement- Our goal is to become{ describe your ultimate goal} 2. The Company a) Application of Laws and Regulations b) Strategic alliances

3. The Business Write your companys name, nature of business, and describe your product and services. a) Unique features of the product. b) Research and development c) New and follow on products d) Uniqueness 4. Competition- You should tell about the key competitors in regard to product, price, location, promotion, management and financial position.

5. Management Team- includes officers and key employees with age. Managing director Board of directors Executives of Sales Executives of Finance Executives of R&D Executives of Marketing Also details of Chartered Accountant, Lawyer, and Other Consultants to be furnished.

6. Capital Requirements- State what your capital requirements are? State your preferences for sources of new capital. You may give the break down as follows Purchase of equipment- (Rs. A) Market new product- ( Rs. B) Fund working capital- ( Rs. C) Define the time you require to pay back the loan? How the repayments will be accomplished and what strategies will be used to achieve that.

7. Financial projections1. Projected profit and loss account for 5 years. 2. Projected cash flow statements and analysis for 1st year. 3. Projected balance sheets for the ends of the first 3 to 5 years. 4. Projected break even analysis for the business.

8. The marketMarket definition Market segment Marketing Pricing Distribution channels

1. Marketing Plan
It is a statement depicting how the entrepreneur will effectively compete and operate in the market place and thus meet the business goals and objectives of the new venture. As per Mc Donald - Marketing Plan is a logical sequence of activities leading to the setting of marketing objectives and formulation of plans for achieving them.

Marketing Plan Process

1. 2. 3. 4. 5. 6. 7. Assessing Opportunities and Threats. Setting Marketing Goals. Formulating Marketing Strategies and Policies. Programming of Operations. Formulating Marketing Mix. Decision on Resource Mobilization. Monitoring the Operations

Understanding of Marketing Plan is made easier by answering the following three questions :1. Where we are? (understanding SWOT) 2. Where we want to be? (refers to objectives or targets we intend achieving in the near future). 3. How to go there or achieve the objective ? (helps in development of a strategy for attainment of objectives).

Essentials of Effective Marketing Plan

It should satisfy the following conditions:1. Simple 2. Practical Orientation 3. Flexible 4. Precise 5. Reliable Information 6. Motivating

Importance of Marketing Plan

1. 2. 3. 4. 5. 6. It anticipates future developments. Management by objectives is made possible. Management by exception is facilitated. Optimum utilization of resources. It facilitates Coordination. Provides basis for control.

Limitations or Failure of Marketing Plans

1. 2. 3. 4. Lack of clarity about goals or objectives. Improper situation analysis. Unrealistic goals. Unexpected competitive moves and product deficiencies.

2. Production Operations Plan

The production of a business plan will depend on the type of business whether it would be a manufacturing concern, retail or a service industry. The following technical aspects may be covered in the plan:1. Establishing the technical feasibility of the project. 2. Selection of a particular manufacturing process. 3. Details of plant and machinery used. 4. Details of handling the raw material and equipment to be used to handle the material. 5. Details of the equipments to be used for the units in addition to plant and machinery. Like how will it be purchased? From where? For how much? What will be the terms of payment? Details of suppliers may also be given. 6. When will the entrepreneur get the pollution control certificate? 7. Measures to be adopted to dispose waste, various methods of waste disposal and equipment to be used for the purpose. 8. The site of the factory should be approved by the concerned authority.

Acquiring Manufacturing Know-How

There are certain projects wherein sophisticated manufacturing know-how is required. Many institutions of government, research laboratories, research and development divisions of giant industries and certain consultancy agencies provide the manufacturing know-how.

Effluent treatment and disposal

In terms of industrial licensing conditions , every industrial undertaking is required to take adequate steps as per the government rules and regulations to prevent Air, Water and Soil pollution. Moreover, such antipollution measures should conform to the effluent and emission standards prescribed by the state government where the industrial undertaking is to be located.

Energy Conservation
In view of scarcity and increasing demand of energy its conservation through better energy management is required. In case of appraisal of new projects the following additional information regarding energy conservation is obtained and reviewed. 1. Steps proposed to be taken for energy conservation. 2. Particulars of monitoring equipment envisaged for periodic detection and measurement of energy losses. 3. Particulars of energy saving features in the main process plant and equipment. 4. The projected energy input cost per unit of output and its comparison with other units in the same industry. 5. Scope of use of solar/ other renewable sources of energy. In certain industries proper and efficient utilization of by- products constitute a major factor for their economic viability and selection of process know-how.

Selection of Production Technology

Production technology refers to such modes of production that are not only technically sound and economically viable but also suitable to local, social and cultural conditions and are in line with national goals and objectives. Some of the important points examined while deciding upon a particular manufacturing technology are as under : It should be already tested and beneficial. If not tested, atleast degree of success is assessed and risks calculated. It should be based on indigeneous raw material and resources. It should suit local conditions like temperature, humidity , quality and availability of raw material, availability of skilled workers, power, transportation etc.

In case production technology to be selected is not fully tested, the following factors are examined. 1. The degree of reliability of the proposed production process. 2. Whether production technology is patented or not. 3. Flexibility of production technology i.e whether the equipment for the process can be put to some alternate use.

3. Organizational Plan or Forms of Organization

Building a strong and a successful organization requires careful planning about the form of organization best suited for the business. Broadly ownership form of business can be categorized into public and private. Public sector comprises of business undertakings owned by local, state of central governments etc Whereas, Private sector includes firms owned and operated by individuals. Organizations where the ownership is jointly in the hands of government and private individuals are called as joint enterprises in the joint sector.

Various factors affecting choice of ownership form are :The right choice of ownership form will determine the success or failure of the business. 1. Nature or type of business 2. Financial Requirement 3. Liability 4. Flexibility 5. Taxation 6. Control 7. Survival or Continuity 8. Business Secrets 9. Government rules and regulations All prospective entrepreneurs must ponder over the above stated points before taking decision regarding the form of ownership.

Sole Proprietorship
The individual form of business organisation is an organisation at the head which stands an individual as the one who is responsible who directs its operations and he alone runs the risk of failure.

Features of Sole Proprietorship

Individual ownership. Unlimited liabilities. Free from legal formalities. Limited scope of operation. Personal Interest. Freedom to start and to end. Monopoly on profit. Business Secrecy.

Partnership
As per Indian partnership act of 1932. Partnership is a relationship between who have agreed to share the profits of a business carried on by all or any of them acting for all.

Features
Plurality of persons. Contractual Relationship. Existence of business. Profit Motive. Principal Agent Relationship. Unlimited liability. Restriction on transfer of interest. Implied Agency.

Joint Stock company

A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.

Features
An artificial person created by law. Separate legal entity. Perpetual succession. Common Seal. Limited liability. Representative management. Right to sue. Transferability of shares.

Co-operative organization
According to cooperative society Act 1912. Cooperative org is a society which has as its objectives in promotion of the interest of its members in accordance with the principles of cooperation. It is a voluntary association of individuals who join together on basis of equity for the promotion of their common economic or business interest.

Features
Voluntary association. Democratic management. Service motive. Open membership. Government Control. Limited liability.

4.Financial Plan
Financial planning is the process of formulating policies and strategies relating to the procurement, investment and administration of funds for the smooth functioning of an enterprise. Financial plan of an enterprise should help in finding out response to the following three queries. 1. How much is the financial requirement? 2. Sources from where funds will be raised? 3. Utilization of funds over a defined period for attaining desired goals?

Features of Small Business Finance

1. Creditworthiness- will be low coz he can only raise resources against the security of his assets. 2. More need for Liquid Assets- since Labour Intensive Technology is used always there is need for cash or liquid assets. 3. More Dependence on Borrowings- since funds available will be limited he is forced to depend on borrowed funds. 4. Personal Management and Control- always interested in retaining control over his business, he has fear that raising funds from sources will lead to dilution of control over the enterprise.

Estimation of Financial Needs

A small scale unit requires two types of finances and these are:1. Short term finance- funds required for meeting day to day requirements of the business therefore has to depend upon trade creditors, commercial banks, customer advances and borrowings from friends and relatives. 2. Long term finance- funds required to buy fixed assets and maintain working capital therefore has to depend on term loans from banks, financial institutions, seed capital , subsidy from government and own funds.

Funds are needed for meeting following business requirements or costs

1. Cost of Fixed Capital- These are the permanent assets of the business like plant and machinery, land and building, furniture and fixtures. 2. Cost of Current Assets- Current Assets can be converted into cash within a short period of time. These include cash and bank balance, bills receivable stock of raw material, work in progress and finished goods, prepaid expenses etc. 3. Cost of Setting Up the Business- All the initial expenses incurred in the setting up of an organization including operating losses suffered during gestation period are included under the head of cost of setting up the business.

4.Nature of Business- Fixed capital requirement is more in case of a manufacturing concern as compared with an undertaking doing only trading business. 5.Cost of financing- It includes advertising expenses, application forms printing cost, brokerage, underwriting commission etc. These costs increase requirement of capital for a concern. 6.Cost of Intangible Assets- They include goodwill, patents and copyrights. Acquisition of these assets from other firms will affect the requirement of capital. 7.Production Technology- Techniques of production can be two types i.e Capital Intensive and Labour Intensive. The capital requirement of an undertaking can be discussed under two heads. a. Fixed Capital b. Working Capital

Factors Affecting Requirements of Fixed Capital

1. Type of Business- The type and nature of business determines the fixed capital requirement of a concern. 2. Size of Business- Larger the size more will be the fixed capital. 3. Techniques of production- Labour intensive production technology will need less investment on fixed capital. 4. Activities Undertaken- More number of activities of a firm will determine its fixed capital requirement. eg- Manufacturing or sale will require less amount for fixed capital needs.

Sources of Fixed capital

1. Equity Shares- are the owners of the company and their contribution constitute the main source of finance. Equity shareholders are the risk bearers of the company and are going to absorb all stress and strains of the business. 2. Preference Shares- These shareholders enjoy preference w.r.t dividend and return of capital. Those investors who opt for limited but steady return on their investment prefer preference shares.

3. Debentures- It provides the firm with another option of raising term loans from the public. they are secured and yield a fixed percentage of business. 4. Term Loans- These are loans obtained from banks and other FIs. They are normally repayable within a period of ten years and carry a fixed rate of interest. 5. Retained Earnings- It accomodates to the surplus or reserve accumulated over years. It can be re-invested in the enterprise for up gradation and expansion. 6. Capital Subsidy- In order to tempt entrepreneurs towards backward areas the central government provides capital subsidy.

Working Capital
WC is the amount of funds necessary to cover the cost of operating the enterprise. 1. Gross WC- Represents the total investment in current assets which can be converted into cash within the accounting year. 2. Net WC- Is the difference between Current Assets and Current Liabilities. 3. Permanent WC- Minimum amount of capital required at all times. 4. Regular WC- is the Capital required to ensure the circulation of Inventory cycle.

5.Reserve WC- represents the excess amount over requirements to meet contingencies like increase in price, depression etc. 6.Variable WC- It is used for short period of time and it represents additional assets required at different times. 7.Seasonal WC- The amount of WC required to meet the seasonal demands. 8. Special WC- Is required to meet special requirements like Launching an extensive advertising campaign.

Determinants of WC
1. 2. 3. 4. 5. 6. 7. Nature of Business Operating cycle Scale of Operation Credit policy Seasonal variations Fluctuations in demand Earning Capacity and Dividend Policy.

Project Report and Feasibility Study

MODULE - 7
INFORMAL RISK CAPITAL MARKET

Meaning of Informal Risk Capital Market

The informal risk capital market consist of a virtually invisible group of wealthy investors called Business Angels, who are looking for equity type investment opportunities in a wide variety of entrepreneurial ventures. The Informal VC Market comprises individuals commonly termed as Business Angels- who provide risk capital directly to the entrepreneurial businesses.

These angels provide the funds needed in all stages of financing, but particularly in start-up financing. Firms which are funded by informal risk capital market frequently raise second and third round financing from professional venture capital VC firms or by issuing equity shares in the market. Thus , an angel investor is a private investor , a wealthy individual, who offers financial backing usually in high risk/high reward opportunities in return for an equity stake in the business. Angels are the earliest of early stage investors. For many entrepreneurs, angels provide capital and frequently, valuable guidance and strategic assistance that they would likely not fund anywhere else.

Angels generally are successful entrepreneurs who want to help other entrepreneurs get their business off the ground. Usually they act as a bridge from the self founded stage of the business to the point the business needs the level of funding that a VC could offer.

Characteristics of Informal Investors

1. They are educated , degree holders and are ready to finance firms anywhere in the world, particularly in the United States. 2. They widely travel to receive funding and make 2-3 deals per year, or join a common circle with other angels to finance larger deals and may invest upto $1Million if the opportunity is right. 3. Angels are ready to invest in any type of opportunity from small retail stores to large oil explorations. 4. The returns expected decrease as the number of years the firm has been in business increases. The expected capital gain is 10 times for start ups within 5 years and 3 times for established firms over 5 years old.

5. Angel investors reject those proposals where,

Risk/Return ratio is not adequate Management team is not adequate They are not interested in the proposed business area. There is disagreement on price. The promoters dont seem committed. The investors are unfamiliar with area of business. 6. An angel investor is an equity investor he provides funds in return for some ownership stake in the entrepreneurial venture. If the venture is profitable and its market value rises, the angels investment increases in value. 7. Most of the angels deal personally with the entrepreneur, they have personal interest in the venture, hence are willing to provide advice and assistance.

How to fund deal?

These angel investors fund their deals through Referrals ( the ways individual investors find out about potential deals). Business Associates Friends Active Personnel Research Investment Bankers Business Brokers

Angels in India
In India, Angels are hard to find as compared to other countries. The demand is increasing in Britain as a result of tightening in lending to small businesses by banks. The ideal angel is someone who is a generation ahead in creating value in the industry. They will provide financial capital as well as intellectual capital. To bring angel investors and innovators together, Indian innovators association made arrangements with selected angels to examine the business plans of Indian

Band of Angels in Delhi

Band of Angels is a unique concept which brings together highly successful entrepreneurs and CEOs from India and around the world who are interested in investing in start up or early stage ventures which have the potential of creating disproportionate value. The Band in addition to money, provide constant access to high quality mentoring vast networks and inputs on strategy as well as execution. The Band members because of their background are better able to access the potential and risks at the early stage. The Band looks in investing upto 1lac USD to 1Mn USD and exciting over a 3-5 year period through an IPO, M&A or Strategic Sale.

Today Angels typically offer expertise, experience and contacts in addition to money. Less is known about Angel investing than venture capital because of individuality and privacy of investments But we have around 2,50,000 Angels active in the country funding about 30,000 small companies a year. There are about 2 million people in the US with the discretionary net worth to make angel investments.

Angel investors look into :Businesses of all kinds like

Day care Real estate Accounting Brokerage Pet supplies Dance studios Construction and contracting Entertainment Landscaping Restaurants and Cafes Appliance repair Crafts Greeting cards Photography Web design Nail and beauty products Online business and more.

Angels tend to match up entrepreneurs in ideals and goals of start up businesses.

Angels understand the needs of a new entrepreneur and provide useful expertise and assistance. Angels will invest in business start ups that interest them. An Angel is an independent wealthy individual and takes risk upon investment. Angels take a vested interest in the business startup in which they become actively involved. Angel investors help entrepreneurs create their businesses by supplying the funding, the office infrastructure and the management and marketing expertise to assist them. Finding Angel investors has become much easier with websites . Take a venture worthy survey to find out more on angel investors websites.

Cautions about Angel Investors

Angel investors should expect returns not before 7 to 10 years They start interfering in the day to day working of the entrepreneur or promoter. Entrepreneur should be aware up front what the Angels motivation, stipulations and intensions are.

Venture Capital
Venture Capital is a new type of financial intermediary, which emerged during the 1970s in the US, in the early 1980s in the UK, in the mid- 1980s in Japan and Canada, and around 1987 in India. Its growth has been quite fast and Venture Capital Industry (as it is widely known as) comprises of a large number of Venture Capital Funds (VCFs). Venture may mean different things to different people. To some it is high risk, high return investment strategy.

Venture Capital
Venture Capital is a method of business funding for companies who are looking to grow or expand at beyond normal rates of business growth. Venture Capital is the money that comes into the business to help fuel the growth. It is a form for equity investment where the investor who gives money also get partial ownership of the company (through shares) and often some sort of control in the company (Seats on the board)

Venture Capital
Capital is provided by venture capital funds which are prepared to finance an untried company that appears to have promising prospects.

Venture capitalist directly purchases equity share of the entrepreneur and also participates in the management of the entrepreneur's business.

Venture Capital
Venture Capitalist focuses on the following :(a) Expects the enterprise to have a very high growth rate. (b) Provides management enterprise. and business skills to the

(c) Expects medium to long term gains and (d) doesnt expect any collateral to cover the capital provided.

Venture Capital is not only injection of funds into a new firm but also includes (i) Inputs of skills needed to set the firm up, (ii) design its marketing strategy (iii) Organization of firm (iv) Management of the firm. It is a long term association of the investor with the entrepreneur.

Features of Venture Capital

1. The investment by VC firms are made in high tech areas using new technology or producing innovative goods by using new technology. 2. An individual venture investment is tremendously risky and chances of failure are high because it provides long-term start up costs to high-risk high reward projects. 3. Returns on VC investment are almost illiquid as the return may be as long as 10 years. It is neither repayable on demand, non can the investor simply sell out his share of company or firm if its performance disappoints. 4. VC dont just invest rather they build companies as they participate in the management affairs and gives advice from time to time.

Features of Venture Capital

5. VC protects the entrepreneur increases the value of his investments which is commonly known as Hands on or After care management. 6. VCF encourages, nurture and help the entrepreneur grow because he has limited resources, the risks are high, and the gestation period is relatively long VCFs also help the entrepreneur to market the product as well. 7. Investments by VCFs are predominantly made in equity shares because the dividends can be delayed till the company starts making profits. 8. The investment made by VCFs are long term investments ranging from three to ten years. VCFs acts as a co-partner in entrepreneur's business, share success and failures, the gains and losses, proportionate to the equity investment made therein.

Venture Capital Process

The Venture Capital investment activity is a sequential process involving five steps:1. Deal origination- VC firm should have a continuous source of deals in order to survive and grow. Deals may be referred to the VCFs by their parent organisations, trade partners, industry associations, friends etc.. 2. Screening- VC firms carry out initial screening of all projects on the basis of some broad criteria. VCF can invest in any industry it wishes, in India only six industries have been approved for investment a) software b) Information Technology c) Pharmaceuticals d) BioTechnology e) Agriculture and f) Allied Industries. 3. Evaluation- VCFs evaluate not only the business plan but also the quality of the entrepreneur and his management team.

Venture Capital Process

4. Deal Structuring- After evaluation of the proposal, the venture

capitalist and the entrepreneur negotiate the terms of the deal.It is an agreement between both the parties which includes a) VCs right to control the investee company. b) Broad Membership. c) Right to replace management in case of poor performance. d) Buy back agreements and acquisitions. e) Making initial public offerings. f) Assuring investment liquidity.

g) Earn out arrangements ( i.e specifying the entrepreneurs equity share) 5. Post Investment Activities (Disinvestment) and Exit- The success of VC activity largely depends on envisaging efficient exit mechanism from investments and successful implementation of disinvestment.

Exit Routes In Venture Capital Process

1. Initial Public Offers (IPOs) The benefits of disinvestment through IPO provides improved marketability, improved liquidity, better prospects for capital gains, status and market control. It can go public through stock exchanges. 2. Promoters Buy Back- In this the promoter buys back the Venture capitalists stake at a predetermined price. The route is suited to indian conditions because it keeps the ownership and control of the promoter intact. 3. Trade sale- VC may also disinvest his holdings through offer for sale to public. The VC sells his stake to the strategic buyer which already owns a business similar or complimentary or plans to enter into target industry. 4. Buy Back of equity by company- As per companies act 1999, companies have been allowed to buy back their own equity shares.

Locating Venture Capitalists

Venture capitalist is different from traditional sources of financing. Venture capitalists finance innovations or ideas which have the potential for high growth but with inherent uncertainties involving High-Risk. VC invest in firms which have potential to provide a rate of return of ten times or more in less than five years. Companies such as Digital equipment corporation, Apple, Federal Express, Compaq, SunMicrosystems,Intel and Microsoft are examples of famous companies that received VC early in their development. Sources of Venture Capital The EXIM Bank IDBIs Venture Fund ICICI Venture Funds Management Company Limited IFCI Venture Capital Funds LTD (IVCF) Gujrat Venture Finance Limited (GVFL) SIDBI Venture Fund UTI Venture Funds management Company Can Bank Venture Capital Fund Intel Capital Punjab Infotech venture Fund

How to Approach the Venture Capitalist

1. Approach the suitable VC firm- The best way to approach is through quality introduction and knowing In and out of the business. 2. Approach the VCF appropriately- Approach the firm through a banker, lawyer, accountant or so. 3. Send a Business Plan- the business should be made considering the needs of VCFs since they are providing large sums of capital for ownership (equity) and also except cashing out within5 to 7 years. 4. Other precautions- The presentation should cover
Companys business The uniqueness of the product or service The prospects for growth The major factors behind achieving the sales and profits indicated. Backgrounds and track records of key managers. Amount of financing required and the returns anticipated.

Response of Venture Capitalist

1. Face to face meeting 2. VC will do preliminary investigation of the plan 3. If Favourable, another meeting willl be held between the management team ( here feeling of trust and confidence is evolved) 4. In the mutual evaluation the entrepreneur should understand the sensitivity of relationship which is yet to establish. 5. Terms of agreement are agreed upon. 6. If the deal is rejected, the entrepreneur can obtain funds from outside sources, including other VCs.

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