FINANCE 394.4 – Financial Management of the Small Firm
Course Outline –Fall Semester, 2011
TTH 8:00-9:30; 9:30-11:00 – UTC 1.104 (Unique #03650, #03655)
Office Hours: TTH 11:00 – 1:00
& by appointment
TA –
Office Hours – By Appointment
Professor: Jim Nolen
Office: GSB 4.126G
Phone: 471-5798, Fax 471-5073
e-mail: james.nolen@mccombs.utexas.edu
Course Material Posted on Blackboard
Electronic Course Packet via Harvard Business Publishing
Required Course Material
The Finance 394.4 Small Business Finance course packet can be purchased at Speedway Printing in
Dobie Mall at 21st and Guadalupe. Due to royalties for the cases, the course packet is expensive and
the copy shop does not accept returns. Make sure you intend to stay in the class before you purchase
the course packet. For those who prefer an electronic version of the course packet, you can go to
Harvard’s website and pay to download the course material at http://cb.hbsp.harvard.edu/cb/access/9740657
Optional Reference Textbooks
1. Valuing A Business: The Analysis and Appraisal of Closely Held Companies by Shannon Pratt, 5th
Edition, McGraw Hill
2. Your BA 385T core class textbook, such as Corporate Finance, 8th or 9th Edition by Ross,
Westerfield, and Jaffe (McGraw-Hill Irwin); or Fundamentals of Corporate Finance or Principles
of Corporate Finance by Brealey & Meyers.
3. Adelman, Philip J. and Marks, Alan M., Entrepreneurial Finance – Finance for Small Business,
Second Edition, Prentice Hall.
ENTREPRENEURSHIP CURRICULUM
This course is part of the Entrepreneurship specialization that includes Opportunity Identification,
Gathering Resources & Launch, Entrepreneurial Growth, Financial Management of the Small Firm
(formerly called Entrepreneurial Finance, Harvest and Negotiations) and the capstone course,
Entrepreneurial Management. This class is quite quantitative and a solid finance/accounting background
is helpful. Fin 286 Valuation is a prerequisite to the course.
If you do not have a strong
finance/accounting background, make sure you get in a study group with someone who does have this
strong financial background. This course is very demanding from both the amount of reading required and
the number of cases discussed during the semester.
THE CASE METHOD
In a case course, much of the learning occurs in preparing for the case, which often requires three to six
hours of readings and preparation, including discussions within your study group. The case method is
student-centered rather than instructor-centered. In the classroom, the students will drive a rigorous
discussion of each case by identifying the problems and issues faced by the managers and formulating
alternatives for solution backed by case facts and assumptions.
In addition to preparing for cases,
there are substantial reading assignments, especially in the early part of the course.
GRADING
The class will set its own standards through friendly competition. The student with the highest weighted
average ranking will receive the highest grade and then the remaining students are ranked from this top
position. A forced curve is used in this class with approximately:
A
AB+
B
B- or below
20%
20%
20%
35%
5% (includes B-, C+, and C)
C-‘s, D’s and F’s will be awarded where deserved. Natural breaks in the distribution will be used to
determine the final grade distribution. No student is allowed to take the course on a pass/fail basis.
1. CLASS DISCUSSION (30%)
Your T.A. will record the class discussion and you will be graded on the quantity and, more importantly,
the quality of your discussion of each case. Cold calls will be used for openings, summaries (closings)
and during the class discussion. Openings and summaries will have a disproportionate weight on your
class participation grade. Since there are more students in the class than cases, not everyone will be
able to open or close a case and therefore, it is incumbent on you to raise your hand and participate
fully in each case. Study group members will be expected to be active in the discussion when a group
member opens a case. Student comments which move the class forward and build on other comments
will be rewarded while just citing case facts or being unprepared for the discussion will adversely affect
your grade. A survey at the end of the semester will allow you to assess your study group’s
effectiveness. Rarely is there a significant difference in how I rank your participation and how your
classmates rank you. Classroom discussion counts toward 30% of your final grade.
Preparation and Missed Class
If you are not prepared to open a case and tell me before the class begins, I will give you a minus one
(-1) for that class discussion. However, If you do not tell me before class, I will award you a minus
three (-3) for that class discussion. If you miss class due to an excused absence, then you must
turn in a written analysis of the missed case to your T.A. (or me) within one week of the missed
class. Failure to turn in a written analysis will result in up to a letter grade deduction. Unexcused
absences and excessive excused absences may result in your being dropped from the class, having
your grade reduced or be given a failing grade in the course.
Students with Disabilities
Students with disabilities may request appropriate academic accommodations from the Division of
Diversity and Community and Engagement, Services for Students with Disabilities at 471-6259.
Cheating
The McCombs Honor Code is in effect for all components of this course. Obtaining help on a case,
either written or oral, from students who have discussed the case in this or other classes is considered
cheating and you will receive an "F" for the course. Students should also not “surf the web”
searching for the outcome or “the right answer”. Cases force you to put yourself in a
managers/owner’s role, frame the problem, identify strategic alternatives and make a recommendations
based on logic and fact-based analysis. Most cases are self contained and research on the web will
not be required.
Tardiness
Being late to class is disruptive to the class discussion. If you are late to class, we will stop and find out
why and you may get the pleasure of opening the case or being cold called multiple times.
Laptop Policy - Students may use your laptop in the case discussions, including case notes and
excel spreadsheets. In fact, you may be asked to display your models to the class with the LCD
projector in the classroom.
2. MID-TERM AND FINAL EXAM CASES (50%)
Midterm – All students will perform an individual analysis of a take-home, mid-term case (individual,
no team analysis). The case will be handed out during the previous week’s class. Limit your analysis
and spreadsheets to 10 pages total and put your name on the back of the last page of your analysis, as
I grade the exams blindly. Please use double spacing on your word-processed analysis and use 12point font size on your text and spreadsheets. The mid-term represents 25% of your total grade.
Final – You will be given an option for your final case.
Option A – A written analysis of a comprehensive case similar to the mid-term. This take-home
final exam case will be distributed to you on the final day of class and you will return the case, your
written analysis and spreadsheet work at the scheduled time on the syllabus. The final
represents 25% of your total grade.
Option B – You may elect, during the first month of class, to form a team of 4 students in your
section that will find a privately held company which will allow you to perform a financial analysis
and valuation of their firm. In lieu of a written individual case final, the team members will work
throughout the semester with their client company. Project teams will present their case study to
the professor in his office during the last week of classes and will turn in their written PowerPoint
analysis at the same time the Option A case finals are due. Your team will act as a financial
consultant and generate a report targeted to the Board of Directors of the company that addresses,
at a minimum: a SWOT analysis; an Industry/Competitor analysis; a financial analysis; and a
valuation of the equity of the firm. This project will require you to find and meet with the business
owner/manager and do original research including searching for comparable companies and
industry benchmarking. I will give you access to databases such as BizComps and PrattStats,
RMA Annual Financial Statement Surveys and Capital IQ/FactSet. Your final PowerPoint
analysis will substitute for the same 25% of your final grade as the case final in Option A.
All team members will receive the same starting grade based on the accuracy, quality and
completeness of your team’s project and ranked relative to the other team’s projects. Adjustments
to individual member’s project grade will be based on their team member’s evaluation of their
contributions to the project. Samples of previous semester projects are posted on BlackBoard.
3. Written Assignments and Take-home Quizzes (20%)
The remaining 20% of your grade is based on written exercises, turned-in case analyses, and two,
take-home quizzes. For each case, your study team should print out a copy of your analysis and
spreadsheet just in case I ask that you turn them in for grading. You may e-mail the files within 30
minutes of class if the files are on your notebook computer. Someone in your study group should have
your spreadsheet work on their laptop or on an overhead slide in case I ask you to show your model to
the class.
Rules of Engagement for Class Discussion:
1)
2)
3)
4)
5)
6)
7)
8)
Come prepared to participate and come on time.
Take a stand and defend it.
State your assumptions.
Give evidence to support your claims but do not just repeat case facts.
Speak concisely. Airtime is a scarce resource, do not ramble.
LISTEN and build on previous student comments.
Direct your comments to your classmates, not the professor.
Respectfully challenge or support the arguments being made.
OPENINGS
While this course is about harvesting, exit strategies and valuation, do not overlook your traditional
SWOT, FIT (PODC) and Industry/Competitor analysis frameworks in preparing your case. For your
openings, take a stand and then defend it. Decide what the central issue of the case is and put yourself
in the decision-maker's shoes. Outline your alternative solutions and the pros and cons of each option.
Never just give “the answer”. List any assumptions such as: normalization of the cash flows, the
discount rate used and why, the terminal value assumptions, which comparable company that was
used and why, any unique risk of the company and any discounts for marketability, minority interest or
other adjustments. Only after you have cited your assumptions should you give your conclusion of
value.
Some of the points that I will use to grade your opening and class discussion are:
a. Was the problem or issue clearly defined?
b. Did you take a firm stand and back it with evidence?
c. Did you outline your assumptions?
d. Did you use the frameworks, valuation models and notes discussed in class?
e. Did you explore the pros and cons of the strategic alternatives?
f. Did you perform both qualitative and quantitative analysis?
g. Was a plan of action presented along with implementation steps, timing and costs?
h. How did you respond to your peer’s questions about your solution?
i. A good question can be worth as much as a good answer. Feel free to experiment with unorthodox
solutions, which will be rewarded if you can defend them with logic and evidence.
REVIEW OF READINGS and CLOSINGS
At the beginning of the class I may ask someone (cold call) to summarize one of the notes assigned for
that class. At the end of most cases I will ask someone (cold call) for the lessons learned in the case.
You should be able to concisely summarize the key learning objectives derived from the readings, the
case and/or the class discussion.
USE OF EXCEL TEMPLATES
Try to develop a valuation excel template that allows you to enter data regarding an asset/cost
approach, comparable market value approach, and discounted cash flow approaches. I have posted a
few examples on Blackboard under “Resources”. You can use this template for the mid-term and the
final to assist you with your analysis of the case.
VALUATION
Finally, valuation is both art and science. If you are looking for "the number" you will get frustrated. We
are trying to "narrow the range of darkness" by using different valuation models and hope to get some
convergent validity and triangulation from these models to give a valuation range. Ultimately, fair
market value will be what a willing buyer and seller agree upon.
Finance 394.4 - Financial Management of the Small Firm
C: Course Packet
B: Blackboard
H: Handout
T: Turn In
Class
#
Date
Topic
Case
Readings
C: Syllabus
Assignment
C: Course Introduction
C: The Case Method
1
Thurs.
Aug. 25
Course Introduction
C: Classroom
Discussion
C: Note to the Student:
How to Study &
Discuss Cases
C: Note on Study
Groups
Browse the
BlackBoard
Class Site
Module I - Starting or Buying a Small Business
Work for Money or
Money Work for You?
2
Tues.
Aug.30
C: The Questions Every
Entrepreneur Must
Answer
1. Small vs. Large
Business
C: Small Company
Finance: what the
books don’t say
T: Turn In
Your
Resume
2. Business
Archetypes
C: A Small Business Is
Not Just A Little Big
Business
Form Study
and Project
Teams
B: Overview of Small
Business.PPT
Prepare An
Elevator
Pitch
Start, Buy, Franchise
or Family Business?
C: A Note on
Franchising
C: Entrepreneur: How
to Buy a Business
3
Thurs.
Sept. 1
1. Exploring ways to
become selfemployed
C: How Venture
Capitalists Evaluate
Potential venture
opportunities
B: entrepreneurship.ppt
Review the
Websites on
the
Assignment
Sheet
Discuss your
“Perfect”
Business
Elevator
Pitch
Class
#
Date
Topic
Case
Readings
Assignment
All In The Family
Succession Planning
C: Transferring Power
in The Family
Business
1. Family Businesses
4
Tues.
Sept. 6
2. Succession
Planning
*ColeTek, Inc.*
C: Definitions &
Typologies of the
Family Business
B: Succession
Planning.PPT
Legal Forms of
Organization
1. Sole
Proprietorship
5
Thurs.
Sept. 8
C: Organizing the
Enterprise: Which
Form is Best for
You?
2. General & Limited
Partnerships
3. Limited Liability
Companies
4. S and C
Corporations
B: Legal Forms.PPT
Founder Choices
1. Equity Splits
2. Roles & BOD
6
Tues.
Sept. 13 3. Rich vs. King
4. Persistence vs.
Exit
Show Me the Money!
Sources of Capital
Sources of Capital
7
Thurs.
Sept. 15
1. Debt
2. Equity
3. Government
*Lather, Rinse,
repeat:
FeedBurner’s
Serial
Founding Team*
C: Why Entrepreneurs
Don’t Scale
C; Bootstrap Finance:
The Art of Startups
C: Note on Angel
Investing
C: Note on Valuation of
Venture Capital
B: Term
Deals
Sheets.PPT
C: Note on Private
Equity Deal
Structures
B: Sources of
Captial.PPT
B: History
of Private
Equity.PPT
Class
#
Date
Topic
A Big Piece of A Small
Pie or A Small Piece
of a Large Pie
Case
*Clarion
Optical*
8
Tues.
1. Financing the
Sept. 20
Company
Readings
Assignment
C: Note on the Theory
of Optimum Capital
Structure
C: Indifference Point
Analysis
2. Capital Structure
B: Capital
Structure.PPT
Module II - Financial Management of the Small Firm
Measuring
Performance
9
Thurs
Sept. 22
C: Note on Unit
Economics
1. Financial
Statement
Analysis
C: Breakeven Analysis
2. DuPont Analysis
C: Note on the
Financial
Perspective: What
Every Entrepreneur
Should Know
3. Breakeven
Analysis
Individual
Assignment:
Match the
industry
Analysis
(due next
class)
B: Financial Statement
Analysis.PPT
B: Breakeven
Analysis.PPT
Financial Strategies
C: Assessing the Firm’s
Future Financial
Health
10
Tues.
Sept. 27
1. Financial
Statement
Analysis
2. Bench Marking
*Match the
Industry*
(Individual
Effort)
C: measuring Business
Performance
B: Financial Statement
Analysis.ppt
T: Match the
Industry
analysis
Class
#
Date
Topic
Case
Readings
Assignment
Growth Can Kill
Working Capital Mgt.
*Butler Lumber*
1. Cash Conversion
Cycle
11
Thurs.
Sept. 29
C: Cash Management
Practices in Small
Companies
C: Note of Managing
the Growing Venture
C: Five Stages of small
Business Growth
2. Percent of Sales
Method of Asset
Forecasting
H: Take Home
Exam
(Due Next
Class - Tues.
Oct. 4)
B: Working Capital
Management.PPT
B: Asset
Forecasting.PPT
Module III - Valuation and Harvesting Strategies
What's it Worth?
Business Valuation
Art & Science
C: Note on Valuing
Private Businesses
1. Precedent
Transactions
12
Tues.
Oct. 4
C: Corporate Valuation
and Market Multiples
T: turn in
Take Home
Exam
2. Guideline Public
Comparables
3. DCF Models
B: Business
Valuation.PPT
4. LBO Models
D-I-V-O-R-C-E
What’s Your Bid
1. Estimating Cash
Flows & Terminal
Value
2. Discount Rates
3. Discounts for Lack *Carlton Polish*
of Marketability &
Control
13
Thurs.
Oct. 6
C: Note on Cash Flow
Valuation Methods:
Comparison of
WACC, FTE, CCF and
APV Approaches
C: Note on Valuing
Control and
Liquidity in Family &
Closely Held Firms
C: Quantitative Support
for Discounts for
Lack of
Marketability
B: Business
Valuation.PPT
H: Midterm
Case
Handout
(Due Oct.
13th)
Class
#
Date
Topic
Value Drivers
& Deal Terms
Case
Readings
Assignment
1. Five Value Drivers;
profitability,
Efficiency,
Leverage, Risk and
Growth
14
Tues.
3.
Oct. 11
2. Stock vs. Asset
Sales
C: Accounting for
Business
Combinations:
Purchase Method
3. Taxes & Liability
B: St. Jude Medical
Valuation Workbook
4. Sec 338 Tax Free
Reorganization
5. Earnouts
6. Seller Notes
7. Non-Competes
Exit Strategies:
When & How To
Harvest
1. Initial Public
Offering
C: A Note on the Initial
Public Offering
Process
2. Sale To Financial
Buyer
15
C: A Managerial Primer
on the U.S.
Bankruptcy Code
Thurs.
Oct. 13 3. Sale to Strategic
Buyer
C: Note on Employee
Stock Ownership
Plans and Phantom
Stock Plans
4. Bankruptcy
Restructuring
5. ESOPS
Greed vs. Fear
Making the Hard
Choice
16
Tues.
Oct. 18 1. Sell
2. Raise Venture
Capital
3. KOKO
*Tickle*
C: The Company Sale
Process
T: Turn In
Midterm
Case
Class
#
Date
Topic
Just a Matter of
Taxes
Leveraged Buyouts
1. LBO Analysis
17
Case
Readings
C: Technical Note on
LBO valuation (A)
*Brazos Partners C: Technical Note on
the Comark LBO*
LBO Valuation (B)
Thurs. 2. Majority
Oct. 20
Recapitalization
Is This A Bubble?
Cross Border
Valuation
18
Tues.
Oct. 25 1. Cross Border
Valuation Issues
Political,
Currency, &
Repatriation Risks
*Mandic BBS - An
Entrepreneurial C: Valuing Cash Flows
Harvesting
in an International
Decision*
Context
Divergence of
Goals?
Private Equity Exits
19
Thurs.
Oct. 27 1. Sale vs. IPO
2. Private Equity
Exits
*Eller Media*
C: A Note on Exits
Rolling Rolling ….
Roll-ups
20
Tues.
Nov. 1
1. Rollups as an Exit
Strategy
2. Buy & Build
Strategy
Assignment
*Project
DialTone*
C: The Consolidation
of Highly
Fragmented Service
Industries: Rollups
Try Doing a
Reverse
Induction
Method
Class
#
Date
Topic
Changing of the
Guard
Management Buyout
Case
Readings
Assignment
*John M. Case
Company*
1. Management
Buyouts
21
C: A Note on Leveraged
buyouts
Thurs.
Nov. 3
2. Financing & Deal
Structure
Stock as Currency
M&A Using Stock
*Automated
Intelligence
Corp*
22
Tues.
Nov. 8
C: A Note on Mergers
and Acquisitions and
Valuation
1. Exchange Ratios
2. Accretion/Dilution
C: Evaluating M&A
Deals -Equity
Consideration
3. Operating and
Financial Synergy
B: Mergers &
Acquisitions.PPT
Is the Whole Worth
the Sum of the Parts?
Breakup value
23
Thurs.
Nov. 10
1. Sum of the Parts
Valuation
*Interco*
C: Note on Sum-of-theParts Valuation
H: Second
Take Home
Exam
(Due Next
Classnov. 15)
Playing Hardball
Ethics in
Negotiations
C: Ethics in Finance
24
1. Ethics In Finance
Tues.
2. Moral, Ethical &
Nov. 15
Legal
*Devon
Industries, Inc.
(A) & (B)*
C: Brinksmanship in
Business
Fill Out the
*B* Case
T: Turn In
Second
Take
Home
Exam
Class
#
Date
Topic
Case
Readings
Assignment
Riding the Wave
*Star
CableVision (A)*
1. Operating and
Financial Synergy
25
Thurs.
Nov 17
*Star
CableVision (B)* C:Capital Market Myopia
2. Exchange Ratios
3. Accretion/Dilution
The Perfect Storm
*Star
CableVision (C)*
26
Tues.
Nov 22
Project
Team
Meetings
With Nolen
1. Restructuring
2. Recapitalization
Prep the “C”
Case and
Bring the “D”
Case
*Star
CableVision (D)*
Lessons Learned
*Star
CableVision (E)*
Read both
the “E” & “F”
Cases for
Class
1. Full Circle
27
Tues.
Nov. 29
2. Lessons Learned
*Star
CableVision (F)*
Project
Team
Meetings
With Nolen
Class Summary
28
Thurs. 1. Teacher Evaluation
Dec. 1 2. Class Summary
H: Final Case
Exam
(optional)
Project
Team
Meetings
With Nolen
Class
#
Date
Thurs.
Dec. 8
Topic
Final Deliverables
Final Case and
Consulting
Projects Due in
Finance Office
CBA 6.222 by
Noon.
Case
Readings
Assignment
T: Final
Exam or
Final
Project