Mbus 806 - Strategic Innovation & Entrepreneurship

Restaurant Financing Memo

Hassan Uddin

MBUS 806- Strategic Innovation & Entrepreneurship

1. Memorandum

TO:                         Mr. Cliff

FROM:                Hassan Uddin

DATE:                        (07/18/2017)

SUBJECT:                Business Financing and Investment

Introduction

The purpose of this memorandum is to bring to your attention the several and viable financing available for the intended purchase of the hotel. Some financing options exist in theory that can be applied for the acquisition of the hotel business. Considering the dimensions of financing that are most likely to explain the data as presented by Cliff, Financial slack would mean that Cliff has access to various financing options available to him, from cash financing, debt or bank financing, and investors input. As per the information provided by Mr. Cliff, financial slack as a determinant of his financing is therefore not viable. The determinant that would best describe the financing option for his hotel business should consider his averseness to risk. Since the business seems to majorly rely on revenues earned from the business and external equity from investors, which are all low in risk levels, as compared to the option of financing from the bank at 8% per annum.

Possible Business Structure for optimum returns

Analyzing the business concept that Mr. Cliff is pursuing brings out some issues that need to be looked at from the various point of views. The analysis of the financing options and the investors about some factors that can be considered key to the success of the business is getting some funding without incurring the huge interest costs that would come with bank financing. The fact that Mr. Cliff has no prior experience in the hotel industry and his desire to incorporate investors who are willing to input their resources and interests into the business shows a lot. In line with all the factors listed in the instructions, this report will analyze the best options for financing the business, and that is vital to the progress and the success of the firm.

1. Debt Financing from the Bank

To have a clear picture of the impact that the highlighted option have on the general concept of partial financing with conditions attached to the financing, some analysis was carried out to determine different values regarding Present Value, Future Value, and Perpetuity. The conditions set were as follows; Calculating the future interest payment of the 70% financing by the bank of the purchase of the hotel; $ 315000 if borrowed for two years at an 8% annual interest rate. The analysis using the above scenarios produced varied and diverse results, therefore underpinning the need for management to have a deeper understanding of the concepts of TVM. The results are summarized as follows:

1. First Investor

The push by the first investor to have a 63% stake in the business for the equivalent amount of contribution that they will input into the business will leave Cliff as the minority shareholder in the business. It, therefore, means that the majority shareholder will make all the decisions that pertain to the running of the business. The impact of this proposal is that Cliff will be the minority in the business with no major powers to influence business decisions that he would have liked to see implemented within the business. The first investor will not only end up making Cliff the minor shareholder but also with the possibility of Cliff losing the control to run the business in case something goes wrong. The high stake he is demanding would also mean that Cliff will have little to leave for his children in future. The first investor also has no prior experience in running a hotel business and adds nothing as far as influencing the profitability of the business is concerned.  Please refer to Exhibit 1 for calculation details on all Investor Options.

1. Second Investor

The proposal by the second investor has a claim of about 10% of all the profits made by Cliff until the entire invested amount is fully recovered. Furthermore, the investor brings with him a wealth of experience within the hospitality industry, and some customers a long. In evaluating and analyzing the proposal presented by the second investor, the option offered gives the business the necessary input that is required to make it running and profitable within the market. The investor not only gives the room to have a total control of the business, but also an easier way of repaying back the total amount invested into the business.