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Freescale Semiconductor Holdings raised $ 783 million in an initial public offering, 25 percent less than it originally sought, after pricing the shares at the bottom of a reduced range.
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Pricing in a Down Economy

December 11th, 2010 Comments off

Pricing in a Down Economy

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Pricing in a Down Economy

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Pricing in a Down Economy

By: Dale Furtwengler

About the Author

Dale Furtwengler is a professional speaker, internationally-acclaimed author and a business consultant who uses counter-intuitive thinking to help his clients increase profits without adding resources. For more information on how counter-intuitive thinking can work for you visit www.furtwengler.com/theinvaluableleader/.

(ArticlesBase SC #1393741)

Article Source: – Pricing in a Down Economy

What message are your sending?

In a difficult economy, the natural tendency is to lower prices in an attempt to retain as much business as possible. Is that a good strategy? Intuitively it makes sense; yet I’ve often found that the counter-intuitive approach – the one that is the opposite of what our natural tendency suggests – produces better results. Does that hold true for pricing in a challenging economy? Let’s take a look.

Lowering prices

We’re all buyers so we don’t have to look far for reactions to the pricing decisions. What’s your impression when businesses you frequent lower their prices? Have you wondered:

Have they been getting in my knickers all along? Are they desperate for business? If I buy from them, can I count on service after the sale? Are they cutting quality or quantity to lower their price? If so, are they doing so without telling me?

I doubt that any of you want to plant these questions in your customers’ minds, yet that’s exactly what you’re doing when you lower prices without getting buyers to make concessions as well. Let’s contrast that with companies that hold their prices in a down economy.

Holding prices

What impression do you have of businesses that keep their pricing constant? Do you feel that:

They are well aware of the value they provide? Confident in their knowledge of what their ideal customers value and that those customers are willing to pay their price? They have a strong rapport with their customers? They are successful and can weather a challenging economy without lowering prices? They’ll be around to provide service after the sale?

Indeed, isn’t this the message you’d rather send to your market? What about the really confident companies – those that raise their prices?

Raising prices

What reactions do you have to price increases from companies you frequent? Do you feel that these business owners or leaders are:

Arrogant? Uncaring? Unaware? Just plain stupid?

Or do you find yourself paying the price anyway? My experience has been that price increases during a difficult economy are often modest and that customers continue to buy regardless of the increase.

Some companies use this strategy, raising prices in a down economy, to eliminate unprofitable customers. There’s an old adage that says “80% of your customers produce 120% of your profits. The other 20% of your customers cost you 20% of your profits?” In the 20 years I’ve been providing consulting services to businesses, I’ve helped many of them increase their bottom line by reducing the top line – their revenues.

Buying habits

While people’s buying habits change during a difficult economy, they don’t often change in ways that we’d expect. Buyers continue to pay whatever price is asked for things they really want. I’m sure that many of you have driven through a trailer park and seen a really old, dilapidated trailer that had a brand new ,000 pickup in the driveway. Or you’ve driven through an older subdivision comprised of 900 square foot homes with a 0,000 RV sitting in the drive. Buyers spend huge sums of money on things they really want – good times or bad.

If buyers are going to cut back, they’re going to do it on things they need, not those they want. That’s one of the reasons why Walmart and Costco have fared so well in this economy. Buyers are looking for lower prices on the necessities.

Had it not been for the downturn, it’s unlikely that WalMart would have fared so well. Why? They’re in the midst of changing from a low-price strategy to one that’s ostensibly designed to compete with Target. If you doubt that there’s a shift afoot, you need look no further than change in their tagline from “Always low prices, always” to “Save Money. Live Better.”

I know that some of you are thinking “Yes, but buyers are also postponing purchases of what they want.” That’s true. My question to you is “How much do you have to discount your offerings to get them to buy now and what does that do to your ability to recover as the economy rebounds?” As a CPA, I am required to get forty hours of continuing education each year to keep my license active. During a break at a CE seminar, I spoke to the presenter. He told me that one of the CPAs in an earlier class said that his firm wasn’t going to lower rates this time. The last time they did it took them five years to recover. Are you willing to put that much of your future at risk?

For those of you who are thinking “Dale, if I don’t lower prices now I won’t be around for the recovery.” If that’s true, and I sincerely hope you’ll challenge that belief with several trusted advisors, then wouldn’t you be better off limiting your losses by getting out now rather than adding to those losses with lower prices?

If you’re considering lowering prices, I encourage you to think about the message you’re sending to the market. It may not be the one you intend.

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Dale Furtwengler -

Dale Furtwengler is a professional speaker, internationally-acclaimed author and a business consultant who uses counter-intuitive thinking to help his clients increase profits without adding resources. For more information on how counter-intuitive thinking can work for you visit www.furtwengler.com/theinvaluableleader/.

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Venture Capital Financing: Structure and Pricing

November 30th, 2010 Comments off

Venture Capital Financing: Structure and Pricing
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Home> Business> Entrepreneurship> Venture Capital Funding: Venture Capital structure and pricing, financing structure and pricing | Posted? April 28, 2009 | Comments: 0 | Views: 441 | it]]> Syndicate this article Copy to clipboard Venture Capital Financing: Structure and Pricing

From: Alan L. Olsen

About the Author

(ArticlesBase SC # 890 801)

Article Source:. http://www.articlesbase.com/ – Venture Capital Funding: structure and prices

Introduction

venture financing can be structured with one or more of various types of securities of just debt-to-debt with equity features (such as convertible bonds or bonds with warrants) into ordinary shares. Any type of security offers certain advantages and disadvantages for both the entrepreneur and investor. The characteristics of your situation and current market forces will be changes to the nature and composition of the security package that is right for you.

Types of securities
Senior debt: Which rule is for the long-term financing for high-risk companies or specific situations such as interim financing. Bridge funding will be used as a temporary financing in cases where the company has received a commitment for financing at a later date, the funds, the debt will retire designed to be. It is under construction, acquisitions, pending a public sale of securities, etc.
Subordinated debt: which is to finance from other financial institutions subordinate and usually convertible common stock, or accompanied by warrants to purchase common shares. Senior subordinated debt lenders consider as equity. This increases the amount of resources that can be borrowed, so that greater leverage.
Preference Shares: What rules will be convertible into ordinary shares. The venture cash flow is helped because to be no fixed loan or interest payments, when the redeemable preference shares or dividends are required to be. Preference shares of the company, increase debt to equity. The disadvantage is that no dividends tax deductible.
Ordinary shares: the usually the most expensive in terms of the percentage of ownership, the venture capitalist. However, sale of common shares of the only viable alternative if cash flow and collateral limits the amount of debt can be at the company.
Debt or equity:

While each of these securities has unique properties, they can be divided into two categories. In structuring a venture financing, is the primary question of whether the funding should take the form of debt or equity are.

Disadvantages of debt to a company

is a company point of view there are two possible drawbacks to debt.

An excessive amount of debt a company can charge the credit, increasing the flexibility in meeting future long-term financing requirements of a very good basis. It can also negatively affect a company’s ability to obtain short-term loans. Of course the form of debt financing the venture will make a difference. For example, subordinated debt will be less impact on credit debt capacity as a senior.
The venture capitalist has the opportunity to appeal his loan if the company in default of the loan agreement. This means that is not available to him under other financing arrangements, puts him in a better position to influence the affairs of the company if it is in default.
Advantages of debt to a venture capitalist
There

From the venture capitalist perspective, there are three major advantages debts.

There is a greater likelihood that the venture capitalist is the client to get back at least a small return. Many of the companies on average venture capitalist’s portfolio are classified as “living dead.” Needless to say, their performance has been disappointing. In some cases, these businesses are able to repay capital with interest, but have limited appeal to potential purchasers or the public. As a result, a venture capitalist with investments in such a society would not be possible for ordinary shares to recover their investment within a reasonable time, if at all.
As discussed above, under certain circumstances, the venture capitalist is in a better position to influence the affairs of society.
The venture capitalist has a senior claim. However, it should be stressed that the significance has a high priority claim on the marketability of the company’s assets and the amount of capital depends on its creditors position pillow. For example, in the case of a start-Lip situation with little or no equity means a high demand little or nothing.
Percentage ownership Needed

While the difference is not large, depending on the particular circumstances of the company, includes a debt less risk than an equity capitalization of the venture capitalist. Accordingly, a company should not give up so much property, if a financing in the form of debt. However, this advantage must be weighed against the disadvantages of the debt.

No matter how the venture financing is structured, it must be that they are priced to appeal to the venture capitalists. There is no clear answer to how much property should a company give up an attractive financing. Roughly speaking, the greater the potential return of the venture capitalist, the less it is perceived ownership demand. In other words, if a company has a patented product, a venture capitalist thinking is revolutionary and highly marketable, he will no doubt settle for less property than he did in the case of 4 companies with a relatively less attractive product has. Thus, his final position of a firm opinion on his possible return will be based.

Before

in negotiations with the venture capitalist, you should determine what your business is worth and how much of your company want to sell. The following procedure may be used to provide a rough idea of how much property you have to give up to get the financing attractive.

Assess the risk with the venture funding. If the investment is very risky, so the venture capitalist looking for a return as high as 15 times their investment within five years. Conversely, if a relatively low level of risk is, the venture capitalist must be met with doubling or tripling of its investment within five years.
Make a reasonable estimate of the price / earnings ratio of comparable publicly traded companies. The market value of the company can then be projected by multiplying projected annual earnings by the estimated P / E ratio of comparable companies.
Divide the total cost estimate of U.S. dollars return for the venture capitalist will, by the projected market value of the company. This gives the percentage ownership of the venture capitalist, since oil to realize the future date on his desired return. It is important to note that all necessary equity financing during the transition period to take into account these calculations.

Case Study

Suppose XYZ Company, Inc., a start-up needs 0.000. The company’s product range seems excellent potential. But because the product is new and unproven, would be an investment in the company as extremely risky. Accordingly, it is useful to appreciate that a venture capitalist and a possible return of at least ten times its total investment in five years would do. Management estimates that the company should be able to “go public” at 20 times earnings in five years. Projected profit after tax for the fifth year, 250,000. Further long-term financing of 0,000 will be needed at the beginning of the third year.

Scenario I

In subsequent calculations it is assumed that the venture capitalist, the initial financing (0,000) also offers the additional financing (0,000), and that he wants a return equal to ten times both. However, it should be noted that if the company has progressed satisfactorily in the first two years it would be reasonable to assume that the venture capitalist with a lower return on the additional funding as it would involve less risk will be satisfied.

Total estimated cost of U.S. dollars required total investment return of $ 1,000,000 Estimated return required X 10
, 000,000
V. Expected Market Value in the Fifth Year VI. VII Projected result, 250,000 VIII estimate the P / E Ratio x 20
, 000,000
Percentage ownership required fifth year Estimated total cost U.S. dollars quired, 000,000 Projected market value of the company in 25 million years of the Fifth
40% Scenario II

In this series of calculations it is assumed that a second investor, the additional financing (0,000) provides. The calculations show that the venture capitalist who sees the start-up financing (0,000) were 20% stake from the fifth year after his return he will have to recognize. However, as do the property up to the additional financing will reduce its ownership position may be, it is more than 20% of the shares first. For example, if one assumes that 15% of the shares must be for the future financing, venture capitalist and the initial financing would be 23% ownership must first be given at the end offers a 20% ownership in the fifth year.

Assume the same facts as Case I, except for a second investor sees the continued funding for 15% of the shares.

Total estimated cost of U.S. dollars required total investment return of $ 500,000 estimate of the yield, the required X 10
, 000,000
Projected Market Value in the Fifth year of high expected result, 250,000 of the estimated P / E Ratio x 20
, 000,000
Percentage ownership required fifth year Estimated total cost U.S. dollars required return, 000,000 Projected market value of the company in 25 million years of the Fifth
20%

So it seems that the investments (0,000) may be attractive to an interested venture capitalist, when the principles of the XYZ Company, Inc. are ready to give around 23% of the shares.

Conclusion

It must be emphasized that the above-described method is very subjective. And, you should remember that what really counts is how the venture capitalist, the relative attractiveness of a company view. Typically, venture capitalists are satisfied with a minority interest. Although a venture capitalist can demand a controlling interest in, generally they are not interested in controlling operating costs. Some of them such as to the amount of property to bind them ultimately obtained in the performance of the company. For example, a venture capitalist and a controlling interest shall first give the customer the opportunity to earn a part of it back. Such an arrangement can be used to be on pricing compromise if there is a significant disagreement between the clients and the venture capitalist.

entrepreneurs familiar with venture capital, it may appear that the venture capitalist looking for an exceptionally high return on its investment. It is however important to understand that to be successful even under the best circumstances, only a minority of the companies in which venture capitalists invested is. He is well aware, and must provide a sufficient return on its successful investments to come up with an acceptable rate of return overall.

From “http://www.articlesbase.com/entrepreneurship-articles/venture-capital-financing-structure-and-pricing-890801.html”

(ArticlesBase SC # 890 801)

Alan L. Olsen – About the author:

Alan Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP , a leading accounting firm in the San Francisco Bay Area. Alan has developed more than 23 years of experience in public accounting and works with some of the most successful venture capitalists in the world, contribute to innovative financial products, strategies for businesses. Alan earned B.S. in Accounting from Brigham Young University and an MBA (Taxation) from California State University, Hayward.

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