COMPREHENSIVE CASE DAN KIM: PART 3
Dan is quite proud of his business plan and realizes that he
has learned a lot in preparing it. He also realizes,however,
that for the business to get off the ground, he needsfinancing.
Suzie will only let Dan use $20,000 of their savings for
the venture, but Dan is of the opinion that this will atleast
help them get started. Once the business is up and running,
additional funds will be generated through sales of the
Ladder Rail.
Dan decides that he would rather establish the manufacturing
facility from scratch than purchase the plant that is for
sale. This way he can arrange the facility in a way thatsuits
him, and he will not have to spend money to retrofit. Inaddition,
Dan lives on an acreage and he already owns enough
property on which to construct the building. He estimates
that constructing a smal l building of 2000 square feet will
cost about S 100,000. Although he can use some of themetalcutting
and -bending equipment that he already has, another
$30,000 is required to obtain the equipment required to
move to commercial production of the Ladder Rail. Dan also
thinks that he will need a truck to haul inventory to theplant
and to deliver the finished product to purchasers. Theestimated
cost for a good used truck is $30,000. Initial inventory
of aluminum is estimated at S 10,000. The financingrequirements
total S 170,000 (Figure 3-A).
Armed with his business plan and his estimate of startup
costs, Dan goes to his local bank to obtain the required
financing. He is surprised that his banker is less than
enthusiastic about his proposal. His banker's response is
clear. "First, you need more equity than this before I could
advance a loan to you. Second, you will need more detail on
your costs. Third, I will need some indication that yourbusiness
has the ability to make the loan payments." With his
banker's words ringing in his ears, Dan is determined to
show how this business could repay a loan. He goes home
and starts to work up a proposed income statement, shown
in Figure 3-B.
FIGURE 3-A
Building
Equipment
Truck
Inventory
Ladder Rail Start-up Costs
$100,000
30,000
30,000
10,000
•
FIGURE 3-B Ladder Rail Income Statement
Revenue: 5000 units at $40
Cost of goods sold: 5000 units at $1 0
Wages (Sid: $50,000; 2 workers
at $30,000 each)
Utilities and phone
Net income
$200,000
50,000
110,000
15,000
$ 15,000
When Dan takes this statement to the banker, he is stilltold
that more work needs to be done. Dan goes home to Suzie
feeling pretty discouraged and is not sure what to do next.
Suzie and Dan decide to spend some time researching
other potential sources of money online. Both are surprised
to learn about the number of angel investors and angel
groups in their region. Suzie thinks pursuing angel support
for their business would be ideal as the couple will not be
burdened with interest costs, which are associated withtraditional
bank financing. Furthermore, if the business fails, they
will likely lose less of their own money. Dan is not asexcited
about angel investors as Suzie is. He argues with her thathe
wants to be his own boss; business angels would want to
inflwence his decisions, and starting the company issomething
they can do on their own. Dan also thinks that if he sells
equity in his business, he could be giving up millions inlongterm
profits if the company succeeds nationally and then
globally.
Questions
1. What items have been overlooked by Dan in both the
start-up costs and the income statements for the
Ladder Rail?
2. What additional statements would the banker likely
require?
3. Do you think Dan should consider other forms of capital
like equity? Why, or why not?
4. What advantages of angel financing is Dan missing out
on in his assessment of this specific type of an investor?
How might Suzie persuade him to change his mind?
5. Would crowd-funding be a good idea for Dan to pursue?
What are some of the potential advantages and disadvantages
of this strategy7
