Hannah Eisenstat had a business plan to own and operate a small business to sell coffee to patrons. The business started out with one owner Hannah being sole proprietorship venture. The business started out a bit weak while Hannah found once it was up and operating that the coffee did not produce the flavor she had anticipated and envisioned.
A regular customer made an offer to become an investor offering an idea that would eliminate the small business into a larger company that would offer a better quality of coffee, but by doing this the owner would have to agree to add a larger machine and enhance the business by roasting their very own coffee beans. This eventually caused the operation to prosper so while growing the company HannaH actually employed more people and had larger sells of coffee going out. This investor would be an Angel Investor which is a type of Investor that lends money to help start or even expand in the growth of a business.
This type of investor can help with expansion of businesses and deciding on some of how the business will operate. (www. go4funding. com, 2010) Natasha was this investor and she would lend Hannah a sum of $75,000 and in return received 40% share in the business. The investor helped in the new ideas that would be put into place in the business such as operations and the expansion of it. While the two having an impact on the operation and seeing that sells would meet expectations, while at the same time the vision they both have for future development, the business started doing extremely well xpansion became quickly as with in the next two years they both decided it was time again to expand out to five more stores to cover a larger territory.
In doing this it would require them to go with bank financing this way they could leave the equity in the business for collateral on a bank loan. The type of loan they choose was a term loan which has stipulations to be paid back with in a five year term. Sense the business had shown such a quick response in growth this type of loan would be possible and the business shows the revenue needed for future sells that makes it a strong investment for both the bank and the company.
Therefore as the business sells sore so does the shares in the business. Having the back bone of the business at a stable and strong point put the owner in a position to attain $100,000 for each store to start up operations. Furthermore by opening five new stores it opened 30 new jobs positions for people in the area. The two owners have done the internal audit of the business and while still making future plans decided to go even further in the venture of the business, by doing this the two did reevaluate their initial business plan and go further, realizing the popularity of the roasted bean they produced.
This popular bean brought in 80% of the revenue while the beverage itself only 20%. A buyer of a local market showed high interest in the product and approached the two owners and wanted to carry this in the supermarket chain. HannaH at the capacity limit of what could be produced would cause Hannah and Natasha to rethink the business once again, and decided to reevaluate the roasting of beans and go with a farmer in Costa Rica while at the same time being able to monitor the quality a bit closer and provide a larger quantity of beans for the supermarket chain which would require a huge increase in the production of the beans.
The need to expand would cost more money so by once again reevaluating the business plan and moving on from providing a beverage into just selling coffee beans wholesale would now be the focus, in doing this the owners decided to invest into a larger facility that offers roasting beans only. Trying to accomplish the expansion and receiving a large sum in the millions of dollars from the bank some times is hard so again finding the right investor for this can help in expansions and it will also depend on the funding needed. (www. go4funding. om, 2010)
When investing into a business that needs more than a million dollars if the owner needs an investor then a Venture Investor Capital would be an option. Hannah found Dixie Partners, a local venture capital firm. The firm agreed to invest $3 million needed to finance the construction of the facility large enough needed to roast the coffee beans for production. The firm in exchange would receive 50% share from the business. HannaH’s operations were strong enough in production that in eight years the company grew and had employed around 200 more people.
Expansion was again needed, so Dixie again invested $4 million for $1,200,000 shares in 2003, and again $8 million for $1,500,000 shares in 2006. Having to make this decision also caused to have a loan term for renewal of five years, which was due in 2004, then again in 2007, additional shares of $400,000 were issued to the employees. What started as a small business vision turned into a large corporate type business having board of directors to What started as a small business vision turned into a large corporate type business having board of directors to expand the distribution of the coffee through out the U.
S. the financing would come through on IPO. The plan was to raise $20 million in new capital at the IPO, then again about $20 million in SEO. An IPO can be risky causing companies that are backed by private equity firms to loose money. (www. businessweek. com, 2010) Hannah did make progress with the decision of working with investors as the board of director’s decision to use the proceeds of the IPO for expansion.
A year later in August 2009 the company did a cash offer to SEO selling additional shares from each owner Hannah and Natasha then selling the shares from Dixie. 4,000,000 each from first two owners then the rest of $2,000,000 from Dixie. Using some proceeds to pay off the term loan and the remaining to use of expansion. After this liquidation that concluded Dixie from any ownership of the company. As part of compensation to the employees they all received $50,000 in shares. Compensating the employees turned out to be a perfect business move; sense in the year 2010 stock per share went from $20 per share to $5 per share with putting a mix match CEO in place.
Hannah wanted to make a come back with the company so she under took leveraged buyout of HannaH, along with 6 other employees. They all started buying shares so when the LBO was announced Hannah owned 5,000,000 and the employees owned an additional 1,000,000. The group then repurchased the remaining $7, 4000,000 shares above the $5 per share @ $7. 50 per share. By combing the equity investment of $7,000,000, bank debt and a private placement of a $30 million semi annual, ten year coupon bond needed to finance the repurchase. That would move again to register this privately place debt again publicly in the next year.
All debt now was convertible and callable in five years. The conversion ratio at 50, with a face value of $1000 and a coupon rate of %5. A convertible note is a type of bond that the holder can convert into shares of common stock, issuing the company cash of equal value at an agreed upon price. (www. wikiepedia. com, 2010) A callable bond is a good choice to get the business going again and this type of bond can be an advantage since the price of it will go up and it will allow the issuer to retain a privilege of redeeming the bond at a point before the bond matures.
With a convertable bond it has its pro’s and con’s with delayed equity financing, delayed dilution of common stock, and the company is able to offer the bond at a lower coupon rate. A disadvantage of convertible bond for the issuer is there is a risk of diluting of common stock and the loss of control of the company. (www. investopedia. com, 2009) Hannah made a wise decision with the way of financing and possibly will once again gain total control of the company she first started.
January 9, 2018
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