Reference no: EM131155787

Case Study I: All She Needs Is a Little Breathing Room

When Debbie Dawson started her business 12 months ago, she estimated it would be profitable within 8 months.  That is not what happened.  During the first six months she lost $18,000 and during the next six months she lost an additional $14,000.  Debbie believes the business is going to get better during the next six months and that she will be able to break even by the end of the second year.  However, her creditors are not sure.  Debbie's business owes the two largest creditors a total of $48,000.  The others are owed a total of $38,000.

Debbie believes that if she can postpone paying her creditors for a period of one year, her company will be strong enough to pay off all of its debts.  On the other hand, if she has to pay the creditors now, she will be too weak financially to continue and will have to declare bankruptcy.  "I really think it's in everyone's best interest to give me 12 months of breathing room," She explained to her husband, "If they will do this, everyone is going to come out on top.  Otherwise, we are all going to take a financial bath."

Debbie has considered broaching the subject with her two major creditors.  However, she is not sure whether this suggestion would be accepted or would be used as a basis for their bringing legal action against her.  "If they think I am trying to stall them, they just might demand repayment immediately and force me into bankruptcy," she explained to a close friend.  "Of course, if they see things my way, that's a different story.  In any event, I'm reluctant to pursue this line of action without talking to my attorney."

Debbie hopes she and her lawyer, Juan, can work out a plan of action that will prevent her having to declare bankruptcy and liquidate the firm.  During her phone call to set up a meeting with Juan, she commented, "If everyone remains calm and looks the situation over very carefully, I think they'll agree that my suggestion is a good one.  After all, I'm not asking them to put any more money in the business, so the most they can lose is what they are owed currently.  On the other hand, if they force my hand, they'll probably be lucky to get 40 cents on the dollar.  If they wait, they could end up with all of their money.  All I'm asking for is a little breathing room."  Juan suggests they meet later this week to talk about it.  "I'm sure we can think of something," he told her.

1. What type of bankruptcy agreement would you recommend?  Why?  In your answer be sure to compare at least two types of bankruptcy and the pros and cons of each.

2. Why would you not recommend the other types of bankruptcy in this particular situation?  Please explain.  What factors might change the bankruptcy method that you would recommend?

3. When selling the creditors on your recommendation, what argument(s) would you use?  What impact does each type have on a creditor?

Case Study II: Looking for Capital

When Joyce and Phil Abrams opened their bookstore one year ago, they estimated it would take them six months to break even.  Because they had gone into the venture with enough capital to keep them afloat for nine months, they were sure they would need no outside financing.  However, sales have been slower than anticipated, and most of their funds now have been used to purchase inventory or meet monthly expenses.  On the other hand, the store is doing better each month and the Abramses are convinced they will be able to turn a profit within six months.

At present, Joyce and Phil want to secure additional financing.  Specifically, they would like to raise $100,000 to expand their product line.  The store currently focuses most heavily on how-to-do books and is developing a loyal customer following.  However, this market is not large enough to carry the business.  The Abramses feel that if they expand into an additional market such as cookbooks, they can develop two market segments that, when combined, would prove profitable.  Joyce is convinced that cookbooks are an important niche, and she has saved a number of clippings from national newspapers and magazines reporting that people who buy cookbooks tend to spend more money per month on these purchases than does the average book buyer.  Additionally, customer loyalty among this group tends to be very high.

The Abramses own all of their inventory, which has a retail market value of $280,000.  The merchandise cost them $140,000.  They also have at a local bank a line of credit of $10,000, of which they have used $4,000.  Most of their monthly expenses are covered out of the initial capital with which they started the business ($180,000 in all).  However, they will be out of money in three months if they are not able to get additional funding.

The owners have considered investigating a number of sources.  The two primary ones are a loan from their bank and a private stock offering to investors.  They know nothing about how to raise money, and these are only general ideas they have been discussing with each other.  However, they do have a meeting scheduled with their accountant, a friend who they hope can advise them on how to raise more capital.  For the moment, the Abramses are focusing on writing a business plan that spells out their short business history and objectives and explains how much money they would like to raise and where it would be invested.  They hope to have the plan completed before the end of the week and take it with them to the accountant.  The biggest problem they are having in writing the plan is that they are unsure of how to direct their presentation.  Should they aim it at a bank or a venture capitalist?  After their meeting with the accountant, they plan to refine the plan and direct it towards the appropriate source.

1. Would a commercial banker be willing to lend money to the Abramses?  How much?  On what do you base your answer?  How has this changed in the past five years?

2. Would this venture have any appeal for a venture capitalist?  Why or why not? What are venture capitalists looking for that this venture contains, and what does it not contain?  What could the founders do differently to make it more appealing?

3. If you were advising the Abramses, how would you recommend they seek additional capital?  Be sure to consider at least three methods of raising capital in your answer.  You should respond with a complete answer, including a comparison of each.