Financing Entrepreneurship - Pimlico Plumbers - Essay Example

CASE STUDY Franchising Despite the 2009’s sentiments by Charlie Mullins that he did not plan to dispose Pimlico Plumbers, in year 2010 this founder who happens to be the MD as well of Pimlico Plumbers limited aimed at selling a part of this business. This led to his entering negotiations with Zockoll, Jim who happened to be the founder of another company by the name Dyno-Rod. This was aimed at selling a minority shareholding of Pimlico Plumbers Ltd-PPL. However, this discussion failed after Mullins discovered that Jim Zockoll had an aim of making the business a franchise. From the findings of this study, the MD of this case study Pimlico Plumbers is reluctant to do a franchise kind of business. Unless a business’ operations can be conducted from a central point, spatial expansion of activities would not be advisable due to its expensiveness. An example of performing business activities in different locations is that of one establishment in a given town and another in a different town or even a restaurant with the expectations of purchasing equipment and recruiting staff as well as renting of other business premises. Otherwise, if carrying out business operations in various geographical locations becomes hard, there is an alternative of licensing a format of business to other 3rd parties asking them for an opportunity of franchise. Pimlico Plumbers Ltd can be advised to consider franchising and on that note the MD, Charlie Mullins may consider the information provided by the growingbusiness.co.uk website. Under circumstances where third parties are seeking franchise just like in this case Zockoll, then there is need to understand this type of business approach. In such situation, franchisees have to take care of the entire or a portion of their cost outlay of launching franchised parent business’ version. Charlie Mullins’ fear of not Franchising is not losing control. But as the case study states he will be ready to lose some stake from his business to other parties. Before he discredits franchising, though, he may consider the information about franchising by growingbusiness.co.uk. Basically, this website argues in favour of franchising business and if the heading to ‘franchising’ topic is anything to go by, then franchising is advisable for Pimlico Plumbers. It says that franchising presents an opportunity of growing a business both nationally and internationally and where the parent business need not make investments in premises and staff. Franchising is not advisable for all businesses in entirety. While it works for some, others are not likely to make it by way of franchising their businesses. All there needs to be is a recognisable or a widespread brand. (growingbusiness.co.uk, 2009) Pimlico Plumbers has been in business since three decades ago, with a staff made up of 133 engineers besides 42 personnel working in their offices. It is the biggest independent service body corporate. It is atleast known nationally in the UK and thus business franchising can work for the company. The clients of the company are with the inclusion of Chelsea football members of the team, Daniel Craig, Hugh Grant and Keira Knightley. The MD has appeared on Secret Millionaire a programme by Channel 4. (pimlicoplumbers.com, 2010) A franchise business is not free of merits and demerits alike. Franchises are advantageous to owners in that they get to undertake their own operations using the brand provided by an already existing business. A franchise also gains a profit share as well as upfront fee. Franchisees take financial risk while a business profile is being grown besides ample revenue. On the other hand, it is hated for its hindrance to expand in future since the only existing potential is that of staking in profits while franchisees enjoy the remainder. Poor management of franchises as likely to demolish a business brand is another disadvantage that should be put in mind. (growingbusiness.co.uk, 2009) (2). External Finance and Bank Borrowing On the issue of obtaining external sources of finance, Mullins says that he cannot encourage outsiders into his company. He continues to state that he has never involved himself in negotiations with his bank manager. From his perspective, outsiders have a tendency of attempting to control the operations subsequent to borrowing funds from them. Thus, if loans are not a necessity in business one should avoid them at all costs. (growingbusiness.co.uk, 2009) What Pimlico Plumbers Limited Company might need for the purposes of expansion is a long-term source of financing. This may mean a source of financing that has a maturity duration exceeding half a decade. This means a long term debt in the context of external sources of finance. A business financing by way of long-term borrowing may constitute, fundamentally, of bonds. It is advisable to utilize such source of financing to cater for fixed assets like equipment, land as well as construction projects and Pilmico Plumbers lay under a close or similar description. The MD should thus think about this form of financing to enhance expansion. The more a business is capital extensive, the more it is advised to apply equity or long-term debt to finance its operations. On the same note, it is essential to know that the expression Capital structure refers to the mix of long-term financing sources a business uses. That is, equity as one source and debt/loan as the other source. An ideal scenario is where the capital structure minimizes on the capital cost while maximizing on value achieved. A factor to consider before making decisions on the appropriate capital structure is the nature of industry and business operations. The overall strategic plan, the existing structure of capital and its past structure and the growth rate prospected are other things to put into account. (Shim and Siegel, 2008 p275) Charlie, the MD and owner of Pilmico Plumbers seems unwelcoming when it comes to sharing of ownership with another party. Therefore, one merit about debt financing he should note is the one presented by Seidman and under this he says in his book that ownership of business is not at all diluted by using debt financing and any value growth of the duration the business is financed using debt reverts to the owner. Also debt has proven over time to be a little bit cheaper than equity due to the fact that lenders have less risk to bear as the owner receives interest and principal payments as well as collateral. Collateral provides another payment method beyond the business’ cash flows. Debt financing is more available than equity as he continues to argue. However, it would be unfair not to mention to Pilmico Plumbers that debt financing is disadvantageous on the other hand. Even in a situation where the firm’s revenues and gains plummet, it remains an obligation of the business to repay a debt. Thus, debt or loan financing does not care whether the business is facing hurdles. Another of the disadvantages of this form of operations’ financing is that failure to honor payments to a lender is detrimental in comparison to equity holders. Therefore, a debt holder has no choice but to pledge assets of the business. This pledging of assets creates even another hurdle since the business cannot borrow using them as collateral. To enhance debt repayment the lenders may call for the personal guarantee by the owner is also a disadvantage associated with loans/debt financing. Lastly, a firm’s operations are rendered rigid since there are restrictions usually placed by the lenders of a loan. (Seidman, 2005 p32) (3). IPO In August 2010, Pimlico Plumbers was never to become publicly floated as per what Charlie Mullins told CNBC. This was also his stand in the case study provided. In the case study, as per 2009, Charlie says that he has no plans of selling what he has lifted from scratch. His stand has, however, been seen to divert especially in year 2010 where he wanted to dispose at least a part of this company by entering negotiations with the aforementioned Zockoll. Charlie aimed at selling a minority shareholding for approximately 25,000,000 pound. As the end of 2010 approached Charlie converses with Dawn Traders regarding floating of shares in year 2011so as to make a try at valuing the company at 50,000,000 pounds. In August of year 2010, as a guest of CNBC, he said that he had been approached by a stock broker who suggested his floating of Pimlico Plumbers. He gave a reason for refusing to float publicly as due to the loss of touch with customers associated with public companies. Making an IPO would thus mean that Pimlico Plumbers would be swaying away from its central mission of giving excellent services to customers. Floating would lead to directors’ and staff benefitting at first. However, the managers would realize they have two masters to serve, shareholders on one hand who need maximization of value and customers on the other who call for excellent services. (Mullins, 2010) Came November 2010 and the reluctance of Charlie Mullins was gone. He announced that he had plans of floating 50% of PPL so as to ensure an expansion nationally was well financed. The PPL MD said that an IPO would provide a significant capital source for the purpose of growth and but the idea of an IPO was still something that he needed to consider since it meant an impact on his ability to determine the direction of this company as its prime controller as well as the effect on the direct interaction with clients. (smarta.com, 2010) An IPO has several advantages as Caselli notes. One of these advantages is the conspicuity of a target company that leads to ample control by investors as well as decreasing agency cost outlays for upgrading performance from a targeted company. The stock exchange will as well have an automatic solution to predicaments like the facilitation of a match required between demand and supply of funds. This makes simpler the process of collecting capital required for the development of the firm. Disadvantages of an IPO also are there. For instance, the gigantic volume of costs needed for the public floatation. A predicament may arise while trying to enhance an appropriate return flows to the new stockholders especially where the particular company is a family company (like the MD of Pimlico says in the case study that this company is a family business). Another of the disadvantages associated with an IPO is the need to change the management. Emanating from this move of public floatation is the trend of take up other forms of investment since due to the fact that risk operations of capital may not yield profits. The company is called for to the changes like the internal organizational changes to put into account the external economic and financial world. (Caselli, pp269-271) ADDITIONAL TOPICS Capital Restructuring Capital restructuring can make a business more appealing to prospective stakeholders because such a financial management tactic reduces level of operation expenses , improves operation effectiveness and raises earning per share hence providing a foundation for much better overall operational results. The business need to re-invent itself in light of the management choice, competitive challenges and ever changing legal and political ecosystem. Capital restructuring can be explored when a company explores business expansion, debt modification changes in corporate control asset divestitures and modification in the ownership framework (revitalizationpartners.com, 2010) Share capital can be restructured by repurchase of shares from the share holders in cash. The significantly reduces the liability of the company, amounting to capital reduction while the company is a going concern. However legally equity share holder are entitled to a return of capital only on its winding up and after the outside liabilities and preference share holders have been paid out in full. Preference share holders are entitled to a return of capital on redemption of preference shares or on liquidation of the company after the outside liabilities have been met. Therefore a return on such share capital without going through the liquidation process of winding up would amount to fraudulent preference unless it is done within the framework of the law. A different approach would be to convert equity capital into loans or redeemable preference shares so as to be paid off at a later date. Such write back of equity capital consisting of shares allotted and fully paid up would amount to fraudulent preference if not undertaken as per legal requirements. (Subramanyam, 2004) Capital can also be restructured by writing down the equity share capital through appropriate accounting entries. This amounts to extinguishments or reduction in shareholders capital entitlement from the company. The effect would be to reduce the amount owed by the company to its shareholders without actual return of such equity capital in cash. Capital restructuring also can be achieved by reorganization of shareholders capital by the following means; reorganization of share capital by consolidation or subdivision, expansion of share capital by conversion of convertible instruments such as convertible debentures , convertible preference shares , equity warrants and others. Diminution of share capital through cancellation of authorized capital, cancellation of issued capital, conversion of loans to equity. All these are re-organization of capital without any financial implication hence they do not satisfy any condition to fall under capital reduction. (Subramanyam, 2004) Capital restructuring through a change in the reserves and surplus without alteration to the share capital. This can be done in the following ways; By writing down the amount of accumulated profits and other revenue reserves in the balance sheet, By writing down the amount of capital reserves in the balance sheet, by writing down the non-cash reserves appearing in the balance sheet and by a combination of any of the above. In this type of capital restructuring the right of the share holders are affected only to the extent of the reserves and not the share capital. Restructuring of capital is restructuring of equity share capital, preference, reserves, accumulated profit and losses. Restructuring can be a process of capital reduction or mere re-organization of capital. Capital reduction is regulated under law; reorganization is an internal process in a company which can be approved by shareholders. (Subramanyam, 2004 pp731-734) Financing Entrepreneurship ‘Failure is not an option’, this is the famous outcry of Gene Kranz when he was faced with white-knuckle crisis on the Apollo 13 mission. Unfortunately, a large number of entrepreneurs beg to differ. Entrepreneurship refers to the act of starting one’s own business. It takes nerves to cut the safety net and start a business on your own using your life savings or any other finances. A study by Small Business Administration has showed that there is an increase in the failure rate of companies especially the start-ups. The major reason for this failure, as has been found by Ernst & young is lack of cash flow management skills. A large number of entrepreneurs are learning how to handle cash flow problems when they are actually experiencing those problems. Therefore, entrepreneurship financing is a very important study for any economy. (Rogers & Makonnen, 2002 p17) Michael dell observes that ‘the secret to start-up success is not to tap into the best source of capital, but rather to tap into every source of capital. It is therefore necessary for entrepreneurs to study all conceivable sources of capital including those that seem boring. This call for shaping the business to fit the financing sources available rather than trying to shape the finances to fit the business thus the entrepreneur must be flexible. There are a number of ways to finance an entrepreneurship. These ways of financing an entrepreneurship are going to be enlisted below. a) Cash floats Most successful companies of the past decade utilize cash floats to get started when investor capital is not available. Cash float refers to the banknotes and coins held in the cash box for day today usage especially for giving change to customers. It is the most basic form of entrepreneur financing. Successful entrepreneurs such as Henry Ford, Michael dell of Dell computers and Jeff Bezos of Amazon are examples of those that have adapted their business to utilize cash float when no capital was available and they all launched their business’ during the early days using cash float. b) Credit card factoring Another source of funding for entrepreneurs is the use of credit cards to get cash advances. Accepting credit cards allows entrepreneurs to get funded without having to borrow small business loans and since it is based on one’s receivables, bad credit on the part of the entrepreneur has no effect. c) Equipment leasing Leasing refers to a contract in which one pays fee to use equipment. Instead of buying equipments, entrepreneurs may lease them as a source of financing. This enables them to use the equipment with little or no down payment. Although leasing is more expensive than buying the equipments or facilities, it allows one to use them when funds are not available. d) Inventory financing This is the use of the inventory in the business to secure credit from the banks. It allows the entrepreneur to use the money tied up in inventory for other urgent needs. This mode of financing is most appropriate when one has high levels of inventory that is tying one’s cash or when the business is enjoying high inventory turnover rate but with no cash to replenish the supply.(startupjunkies.org, 2008) e) Venture capital Small businesses with exceptional growth potential attract venture-capital firms to invest in them. In this type of financing, certain equipment and infrastructure needs are financed through a creative vehicle that allows start-ups to do so. f) Business angels Another financing method is through business angels who are financiers ready to invest their personal capital directly in start-up businesses. They are usually successful entrepreneurs interested into new ventures. g) Initial Public Offers Initial public offers are also suitable sources of finances to entrepreneurs who are qualified to do so. This allows floating a company’s share in public for the members of public to participate in the provision of capital to run the company. It also makes a company to have a national as well as an international outlook. In the light of the above sources of finance to entrepreneurs, PPL can choose the mode that best suits it and one that is readily available instead of selling part of the business. (Barringer & Ireland, 2006 p13-16) These aforementioned ways are the kinds of approaches one can apply to finance an entrepreneurship. Reference list: Barringer, Bruce R & Ireland, R Duane (2006).Entrepreneurship: successfully launching new ventures. Prentice hall. pp13-16. Caselli, Stefano. (2010). Private Equity and Venture Capital in Europe: Markets, Techniques, and Deals. Edition illustrated. Academic Press. pp269-271. growingbusiness.co.uk. (2009). Quotes of 2009. Retrieved 14th May 2011 http://www.growingbusiness.co.uk/quotes-of-2009.html#10 growingbusiness.co.uk. (2009). Franchising. Retrieved 14th May 2011 http://www.growingbusiness.co.uk/franchising.html Mullins, Charlie. (2010). Why I'll never float Pimlico Plumbers. Retrieved 14th May 2011 http://realbusiness.co.uk/charlie_mullins/why_ill_never_float_pimlico_plumbers pimlicoplumbers.com. (2010). Pimlico Plumbers. Retrieved 14th May 2011 http://www.pimlicoplumbers.com/ revitalizationpartners.com. (2010). Capital Restructuring- Three Most Common Techniques. Retrieved 14th May 2011 http://revitalizationpartners.com/capital-restructuring/capital- restructuring-three-most-common-techniques/ Rogers, Steven and Makonnen, Roza (2002).the entrepreneurs guide to finance and business: wealth creation techniques for growing a business. MsGraw-Hill Professional. p7. Seidman, Karl F. (2005). Economic development finance. Edition illustrated. London: SAGE. p32. smarta.com. (2010). Pimlico Plumbers to float? Retrieved 14th May 2011 http://www.smarta.com/blog/2010/11/pimlico-plumbers-to-float Shim, Jae K. and Siegel, Joel G. (2008). Financial Management. Edition 3, illustrated, revised. Barron's Educational Series. p275. startupjunkies.org (2008). Where the theory and practice of successful start-up entrepreneurship converge. Retrieved May 9 2011 http://www.startupjunkies.org/finance.html Subramanyam,( 2004) . Investment Banking. Tata Mcgraw-hill Education. pp 731-734. Read More