Finance 394.4 - University of Texas at Austin



Finance 394.4

Small Business Finance Class

Small Business Consulting Project

In lieu of a case final, students have the option of choosing to do a small business consulting project throughout the semester with the final deliverable due at the time final case exams are due. The election to do the case study must be made during the first 30 days of the beginning of the semester. Students are to form teams of three to four students (4 students maximum) in their section of the class and each team will be required to: 1) find a privately held, owner-managed business willing to allow a case study to be conducted on their company; 2) conduct a thorough industry, company, financial and business valuation analysis; and 3) produce a PowerPoint presentation of your analysis to present to the Professor and the Company’s owner/manager. Some examples of previous project deliverables are posted on BlackBoard.

While the students may choose their own team members, the Professor reserves the right to restructure the groups to achieve the goals of the class. Ideally, the members of each group should come from different disciplines and it would be helpful if members had strengths in marketing, finance and accounting, and management.

For confidentiality purposes, your team will disguise the name of the company, it’s owner and other personnel, and it’s location. I have prepared a letter of introduction to assist you in calming some of the fears of the business owners. We will also execute a confidentiality and non-disclosure agreement with the owner/manager.

The primary criteria for selecting a company are:

Privately owned and operated (no publicly traded companies). Venture-backed companies are eligible if the founders are still involved in the company.

Minimum of three years of operating history (no start-ups).

No non-profit organizations.

Avoid personal service companies like accountants, doctors, lawyers, real estate agents and engineering firms. Avoid restaurants and bars.

In performing this project, each group will be required to do the following:

1. Select a company from the “for profit” business community. If you have worked for a small business or have family who operate a small business who are willing to let your perform a case analysis, then this would be the easiest way of finding a case. If you do not know any small business owners, then you may contact commercial bankers, chamber of commerce, accountants, lawyers, Small Business Administration, Austin Technology Incubator, or other professionals who might give you leads to companies willing to participate in a case study. The company does not have to be local or even a domestic company. International cases are welcome. You may contact businesses direct and tell them you are doing this for a graduate finance class and that all information will be kept confidential and the name of the company, location and financial data will be disguised. The business owners may contact me if they want additional information. Finding a company to analyze is your individual and team’s responsibility and failure to find a company will result in your being required to take the case final. I can provide you with referral and network you to people, but I cannot be expected to provide cases for you to analyze.

The firm should have been in business a minimum of three years and must perform at least two of the following functions: financing, production, and distribution. The company can be in service, wholesale, retail, manufacturing, or construction, but must be privately owned and operated. Personal service companies like doctors, attorneys, accountants, real estate brokers and engineering firms should be avoided. Restaurants and bars should be of last resort and need the professor’s approval. If you are unsure that your case meets the requirements, ask me.

2. Since your Professor may not be familiar with the company, your deliverable should contain facts regarding the company’s history, the industry and the competitive landscape.

a. A standardized financial spread of the historical financial statements for three years plus the most recent interim period, including financial ratios benchmarked against the industry. An excel template will be provided for this purpose.

b. Industry information, including Risk Management Association (RMA) Statement studies is available on-line under indexes . Dun & Bradstreet data for benchmarking is also available in print form in the PCL Library.

c. Competitor Information

d. Comparable Transactions – You will provide the Professor with the company’s SIC or NAISC code and he will send you an excel file with transactions from PrattStats and BizComps. You will also be given access to Capital IQ (a user name and password will be e-mailed to you) and can only be accessed by logging on from campus.

e. Comparable Public Companies including their business description, valuation multiples, debt structure, growth rates, betas, etc. can be obtained from business website portals like () , Google finance and Yahoo finance. The FTTC also has access to FactSet and Bloomberg.

f. Financial projections for five years, either from the company or provided by your team, along with the assumptions driving the forecast.

Questions to be researched:

I. Disguised Name of the Company - Tell the type of statements used to get information, i.e. audited financial statements, compilations, tax returns, CPA prepared, in-house accounting, etc.)

II. Introduction

A. Location of Company (pick an area of country and size of town similar to the actual town the company is located with similar demographics if location is important to the success of the firm)

B. Demographics of the area

C. Area of Operations (local, regional, statewide, national, international)

D. Date of formation of the Organization

E. Description of Organizers and/or Present Owners and Managers

1. Education

2. Work Experience

3. Age

4. Why and how did they start the business?

F. Description of the Legal Form of Organization

1. Type

a. Proprietorship

b. Partnership (General or Limited)

c. Limited Liability Company

d. Corporation

1. C Corporation

2. S Corporation

2. Do they have buy/sell agreements, written shareholder or partnership agreements, stock restriction agreements?

G. Goals of the organization as the Owners/Managers see them

1. Short-term Goals

2. Long-term Goals (Do they have an exit strategy?)

H. Define their strategies for achieving these goals.

1. Marketing Strategy

2. Operating Strategy

3. Distribution Strategy

4. Financing Strategy (Method and Amount)

a. Initial Financing

b. Current Financing

c. Future Financing Requirements

III. Activity (Business Model)

A. Description of the Firm’s Products or Services

1. How diversified is the product/service

2. Are they dependent on a few customers or suppliers?

3. Is their any proprietary nature to the product?

4. Any barriers to entry, threats of new entrants into the market?

5. What stage is the industry (early, mature, declining)

6. Sensitivity of sales to the general economy

7. Importance of Business Location (use a similar locale)

8. Government Regulatory Issues

B. Place in the Industry –thorough industry and competitor information should be provided

1. Market Share (what is the firm’s current sales volume relative to others in the industry?) Who are the main competitors? What are the competitor’s strengths and weaknesses?

2. Who are and where are their customers?

3. Growth rate of sales/ sales forecasts (general prospects)

C. Company SWOT analysis - Strengths and Weaknesses,

Opportunities and Threats - Discuss how the company can

mitigate threats and weaknesses and capitalize on strengths and

opportunities.

1. Dependency on key managers/owners.

2. Ability to adapt and diversify.

3. Ability to attract and retain skilled employees.

4. Ability to generate or obtain capital.

5. Concentration of Customers or Suppliers

D. Description of Organizational Structure

1. Formal Structure

2. Informal Structure

E. Description of Business Functions Performed

1. Production (in-house or outsourced)

2. Marketing & Sales (Company employed or independent)

3. Distribution (describe the channel)

4. Finance (what is the current capital structure and what are the plans for future capital requirements) How was the financing decision made? Optimum capital structure? Do they provide customer financing? If so, is it third party financing?

5. Other business functions performed.

IV. Policies

A. Description of Working Capital Policies

1. Cash

a. Average Cash Balances Maintained

b. Investment Criteria for excess cash (where invested)

c. Dividend Policy

d. How are cash needs financed (short-term or long-term)?

e. Payables Policies (are discounts taken, what is average terms given and what are the average days to pay) What is the company’s credit rating?

2. Inventory

a. How is inventory financed?

b. What is the accounting method used?

c. What are the annual losses due to obsolescence & Spoilage?

d. What is the inventory policy? JIT? How closely is this policy followed? Who is responsible for inventory levels? Do they have a purchase order system? How often do they take physical inventories? Are they on perpetual inventory or point of sale system? Is inventory computerized/bar coded? Do they have a purchasing manager or materials manager?

e. What is the company’s inventory turnover relative to the industry turnover? (Use RMA, D&B or Industry sources).

f. What is the lead-time to replace inventory?

g. Are their substitute products? How dependent is the company on key suppliers? How do they negotiate price?

h. Do they get volume discounts? What are the ordering costs and carrying costs?

3. Receivables

a. How are receivables financed?

b. What are the stated credit terms?

c. What percent of sales are for cash? What percent take discounts? What is the bad debt percentage? Do they accept credit cards?

d. What is the firm’s days sales outstanding (receivable turnover) relative to the industry?

e. What does the aging of accounts receivable look like? What percentage of accounts is delinquent?

f. How does the company evaluate credit risk? Do they use a credit bureau? Who makes the credit decisions?

g. Is the company or has it ever factored its accounts receivable?

B. Fixed Asset Policies

a. Do they lease or own their building and/or equipment? How do they make the leave vs. buy decision?

b.. What method of depreciation do they use?

c. What arrangements for replacement of assets have they made?

d. How do they finance fixed asset acquisitions? Internally generated or externally generated funds?

e. What is the firm’s current capacity (monthly sales maximum?) What utilization of assets are they achieving?

f. What is the fixed asset turnover relative to the industry?

g. Do they use capital budgeting techniques? If so, what model do they use? NPV, IRR, Payback?

V. Please explain any extraordinary items that may have occurred during the period being examined. Excessive owner compensation, sale of assets, discontinued operations, mergers or acquisitions, changes in accounting methods or change in fiscal years, loans to shareholders or shareholder notes to the company, or any other unusual, n on-recurring items should be noted.

VI. Exhibits to be included:

A financial template in Excel will be provided for your input of the financial information on your company. You are not to turn in the original financial statements of the company. The templates will standardize and compact the financial data and will be posted to the Professor’s black board site for your case analysis and briefs. You will enter the balance sheet and income statement data into the template. The template will calculate a cash flow statement and ratios. The template also has a forecasting section for proforma balance sheet; income statement and cash flow statement based on the default and user assumptions. All of the template should be filled out and the class during your presentation will debate your assumptions. The Excel template can be downloaded from Black Board at:



There are 9 sheets in the workbook.

The financial data you will need to collect from the Client Company is:

A. Balance sheets (year end for three to five years plus the most recent interim statement). (Tax return may suffice)

B. Income Statements (year end for three to five years plus the most recent interim statement). (Tax returns may suffice)

C. Cash Flow Statement (if available). The excel template will create one from the P&L and Balance Sheet if the company does not have a cash flow statement.

C. Company Prepared Budgets (Proforma Balance Sheets, Income statements, cash budgets, capital budgets)

D. Other Relevant Information - examples listed include:

1. Revenue projections and assumptions

2. Competitor Information

3. Depreciation schedule

4. Note Payable Schedule

5. Industry forecast/Economic forecast

6. Comparable Firm Analysis including benchmarking financial performance and valuation benchmarks.

7. Transaction Multiples (Edgar SEC 8-K filings, BizComp, PrattStats, MergerStat, Capital IQ, Venture Expert, etc.)

8. Risk Management Association (RMA) or D&B Industry data

9. Seasonality of Sales or Business Cycles

10. Aging of Accounts Receivable and Payable

Final Deliverable

You should approach the presentation as if you are the company’s consultants and are presenting your analysis to the Board of Directors of the company. You will meet with the Professor for one hour during the dead week between the end of classes and the due date of the deliverable. The Professor will make suggestions for your team to incorporate in the analysis. You will turn your PowerPoint Presentation in to the Professor on the due date of the syllabus. You will be given a form for the owner of the business to acknowledge that you have presented your analysis to him/her and given a written copy of the analysis. The owner will then e-mail or fax me the confirmation.

a. Presentation of the strengths, weaknesses opportunities and threats of the company. Identification of any problems associated with the company. The problems or weaknesses should be comprehensive; that is, they should include production and distribution problems as well as financial problems. Has growth created personnel problems (turnover), quality problems, delivery problems, capacity problems, or excessive strain to the company’s systems? Has the company overlooked a distribution channel, should they make or buy product, and do they have excessive personnel or capacity. Use of a SWOT or FIT framework may be appropriate as a tool .

b. An analysis of the industry and competitive landscape. Is the industry growing, mature, declining, or consolidating and what are the implications to the company and its affects on the company’s financial performance? Is the company poorly positioned? Should it prepare for harvest or grow through acquisition or organic growth. A Porter analysis is a good framework but again I do not want just 5 Porter boxes with your conclusion that this is a poor industry or not. The company is already in the industry so what does the Porter analysis tell you the owner’s course of action should be.

c. Perform a thorough financial analysis addressing the company’s trends and benchmark against the industry averages. You should include the company’s liquidity, leverage, coverage, turnover, profitability and return ratios. An analysis of the break-even point, cash conversion cycle, DuPont analysis and future financing requirements.

d. A valuation of the company using a cost approach, a comparable market approach, and a DCF analysis approach. Assumptions about future cash flows, tax rates, growth rates, discount rates, terminal values, liquidity discounts, control premiums, non-earning assets and other valuation analysis should be included in the presentation.

e. Summarize your analysis of the company and outline the alternative solutions to these problems and your recommendations. This is where you will differentiate your project for others by being very insightful about an action plan for the owner.

4. The members of the team will provide the business owner and instructor with a written analysis of the case. The final deliverable may incorporate suggestions made during the presentation to the Professor. The written analysis will be turned in to the instructor and a copy given to the owner/manager of the business. This written analysis should include the following:

FINAL WRITTEN PROJECT ANALYSIS

Copy To Be Given to the Business Owner and Professor

1. EXECUTIVE SUMMARY

2. YOUR TEAM’S ANALYSIS - POWERPOINT PRESENTATION WITH COMMENTS THAT INCLUDES:

1. SWOT, INDUSTRY AND COMPETITOR ANALYSIS

2. FINANCIAL ANALYSIS OF COMPANY

3. BREAKEVEN ANALYSIS & CASH CONVERSION CYCLE

4. DuPONT ANALYSIS

5. FORECASTS

A. Proforma Balance Sheet

B. Proforma Income Statement

C. Proforma Cash flow Statement

6. EXTERNAL FUNDS REQUIRED ANALYSIS

7. VALUATION OF THE FIRM’S EQUITY

8. IDENTIFICATION OF PROBLEM AREAS AND STRATEGIC ALTERNATIVES

9. SUMMARY, RECOMMENDATIONS AND CONCLUSIONS

Copies of previous class cases are available on BlackBoard.

Performance Evaluation

The consulting case will count 25% of your total grade in the class. Your project will be ranked against the other projects in terms of completeness and accuracy of the analysis. The best case will receive 97 points, the second best case will receive 93 points, the third best case will receive 89 points, the fourth best will receive 85 points, the sixth best will receive 81 points…. and so on. Each team members will evaluate the contributions of the other members of their team. If all participated equally, all members will receive the same grade as the team grade. If other members of the team rank your contributions as significantly higher or lower than the rest of the members, then that member may receive a higher or lower grade the team grade. Failure to present the final deliverable to the business owner will result in a failing grade.

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