Growing the Business

Chapter 5Growing the BusinessCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedChapter OverviewNeed for GrowthShareholder ValueBenefits of GrowthGrowth StrategiesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedNeed for GrowthEssential to a company’s successPrivate company owners expect profits, cash flow, and ROI to increaseStockholders expect the price of their stock to riseGrowth company’s earnings increase at least 15% each yearCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedShareholder ValueShareholder Value = Market ValueMarket ValuePublic CompanyCurrent market price of common stock multiplied by number of shares outstandingPrivate CompanySale price of the company on the open marketCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedPublic Company GoalsIncrease earnings per share (EPS)EPS = EBIDTA / Shares of Common StockIncrease the company’s stock multipleMultiple = Current Market Price / EPSIncrease the market price of common stockCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedRisk and RewardInvestors are risk averseThe greater the risk, the higher the ROI demanded by investorsBetaMarket-related risk measurementMarket beta = 1Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedPrivate Company GoalsIncrease cash flowGenerate a favorable return for ownersCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBenefits of GrowthClear career paths for employeesAttract qualified employeesIncrease market shareLimit new competitionDiversify riskCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesIncrease sales and Productivity of Existing PropertiesIncrease Profit MarginIncrease salesReduce expensesIncrease labor productivityReduce credit card commissionsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesExpansion of Physical FacilitiesFocus on current or new marketsRequires large quantities of new capitalEarnings of additional assets must be greater than the company’s cost of capitalIf earnings are lower, earnings per share are dilutedCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesFranchisingSell the rights to a brand in a specific location/market for a stated number of yearsFranchisees pay:Franchise feesFranchise royalty feeAncillary servicesMarketing, training, purchasing fees, etc.Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedFranchisingBenefitsGreater distribution systemRapid growth without large amounts of capitalHigher profit marginsDisadvantagesRisk of not being able to control brand standardsUnable to control quality and consistency of the product and servicesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesManagement ContractsOperate properties for owners without management capabilitiesAvailable primarily to lodging companiesFees3% to 5% of total salesIncentive fee based on a percentage of operating profitDisadvantageRisk of contract being terminatedCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesMergers and AcquisitionsAvailable to large public companiesMust have substantial amounts of capitalFunded by:DebtExisting equitySelling new shares of stockBarteringCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesInitial Public Offering (IPO)Utilized when:a company is ready for rapid growtha company’s potential future value is much greater than its current valueCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedIPO ProcessInvestment banker manages processLaw firm writes prospectusAccounting firm prepares certified audits for prior three yearsRoad showStock offering is pricedManagement meets with the stock exchangeCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedInvestment BankerPlays important role in the IPO processBefore stock is soldHelps value the companyEstablishes a price for the stockManages the selling processAfter stock is on the marketMaintains a market for the stockCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedManaging a Public CompanyManagement at public companies have many responsibilitiesRequired to file reports with the SECDeal with Wall Street research analystsMust report to:board of directorsstockholdersCopyright © 2007 by John Wiley & Sons, Inc. All rights reserved