#+title: Section 13 | Lesson 76 - financing alternatives #+HTML_HEAD: #+OPTIONS: H:6 * Links - [[./../mba-main.org][TOC | Business]] - [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4301162#overview][S14:L76 course video]] * notes ** Harvesting an investment - asset can be transferred to investors - company can be sold and cash distributed to investors - company goes public and shares are distributed 6 months post IPO lockup ** Planning an exit strategy - need to explain liquidity targets to investors when you are raising capital - make sure you are both thinking the same way - have a lawyer prepare the documents ** Buyouts - "leveraged buyout" LBO - financed using debt - must have great cash flows to secure loans *** firms - many public companies partner with private equity firms and go private - goal is to go public again at some point **** example firms - KKR - TPG *** management buyout (MBO) - when management buys the company - loans - investors - their own money - gains - independence - control *** Employee Stock Ownership Plan (ESOP) - employees buy the company - all employees own it not just management ** Initial Public Offering (IPO) *** what is an initial public offering - private company sells shares to the public through a stock exchange - this allows - company to raise capital for growth - early investors and employees to convert their holdings to cash *** shares **** types of shares ***** primary - newly issued shares created by the company for the IPO - when sold to outsider investors the money goes to the company's treasury - used to fund expansion, pay debt, invest in new projects ***** secondary - already existing shares held by people "shareholders" - it's the shareholders that make money when selling their shares - venture capital firms - founders or employees that want to cash out **** in practice - most IPOS are a mix - primary raises growth capital - secondary is the payout for whoever bought in early **** dilution - when primary shares are made and sold, existing shares are worth less - company gets money to raise to invest in projects that can increase it's overall value in cluding the diluted shares *** structure, underwriting and listing requirements - underwriting spread is fee the investment bank gets (usually up to 7%) **** listing requirements for NASDAQ - share price >= $4, at least 1M publicly held shares - several years of operating history and financials - must have a Board of Directors (BOD) with independent members - oversee management - ensure regularatory compliance - protect shareholders - maintain audient, compensation and nominating committees ** Troubled Ventures and Turnarounds *** basics - turnarounds don't work in tech - very rare exceptions - steve jobs at apple - IBM - this is due to 'secular decline' - A secular decline is a persistent, structural decrease in growth, productivity, or demand that continues for many years regardless of normal economic ups and downs. *** corporate raiders - dont let sentiment cloud your judgement - it's a zombie. shoot it and move on. - liquidate - sell it *** ways to die - financial distress :: when cash on hand is insufficient to pay for current liabilities - load default :: one missed payment and it is over - acceleration provision :: when a firm defaults on just one payment then all future payments are due immediately - cross default provision :: one late payment on one loan causes all loans to go into default - foreclosure :: the legal process where lenders collect and take stuff from you - insolvent :: negative book equity *** reqlities - 25% of companies go belly up within 2 years of being founded - more than 50% of companies shut down within 4 years of being founded *** bankruptcy law - a legal code that has many chapters that protect you **** chapter types ***** types - chapter 7 :: how people / firms liquidate stuff - chapter 9 :: how cities deal w/ bankruptcy - chapter 11 :: how firms deal w/ bankruptcy - chapter 12 :: how farms deal w/ bankruptcy ***** general rules - chapters 1, 3, 5 :: general bankruptcy rules - chapter 15 :: trustees that help banks - chapter 13 :: restructuring personal debt ***** most important - chapter 7 - liquidating - chapter 11 - restructuring **** chapter 7 liquidation - after a person / company files for bankruptcy then a court supervises the liquidation process **** capter 11 bankruptcy filing - temporarily protects a distressed firm so they can restructure or pay off debt ***** types of restructuring - operations restructuring :: incraese revenue or cut expenses - asset restructuring :: selling assets to improve ratios - day sales outstanding - inventory conversion period ***** this can save a company - 65% of companies reorganize - 28% liquidate - 7% merge with another firm ***** steps 1. file for chapter 11 with one of 300 bankruptcy courts 2. a bankruptcy judge accepts or doesn't accept petition 3. if no fraud a company has 120 days to make a plan 4. 60 days is then given to creditors to accept the plan 5. investors then vote