Case study: Expanding a business

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Halpern Engineering Ltd Introduction Halpern Engineering Ltd (HEL) is a highly successful engineering corporation, which has a significant share of the UK and global market, 70% and 6% respectively in the manufacturer of machines that produce biodegradable polythene bags. As a result of the business success and also to capture a greater share of the rising demand for the end product, John Helpern, CEO and major shareholder, is faced with a dilemma regarding whether the business should continue to expand, in which case there is the requirement for additional funding of approximately £4 million. Alternatively, there are the options to sell the business of maintain business growth at a reduced level and therefore eliminate the need for addition help. This paper sets out to analyse the four main options that are available to the business, these being venture capitalism, bank funding, business sale or business takeover. 1 Venture Capitalist Venture capital is medium to long term finance provided by an individual or corporation, usually “in return for an equity stake in potentially high growth unquoted companies.” However, in the case of Helpern Engineering Ltd, a venture capitalist has agreed to provide the required £4 million of funding in the form of a loan, which will be subject to the following conditions: –

  1. Interest, payable half yearly in arrears, to be set at 10%
  2. Loan repayable in full in 2011
  3. Alternative option for venture capitalist to purchase 50.1% of the company shares, these being newly issued shares, in 2011 in exchange for the capital repayment.

However, it is anticipated that the VC will want to protect his investments by imposing certain covenants upon the business and its management, which will need to be carefully considered (Pearce and Barnes 2006). It is anticipated that these will consist of the following. Director’s commitment and confidentiality The VC is likely to include a covenant that restricts the directors ability to change their employment contracts and also imposes certain other management confidentiality condition that prohibit directors from leaving the business and setting up in competition, or enticing away suppliers and customers. Shares and Memorandum of Articles It is normal for there to be a condition that forbids directors from issuing shares or making changes to the business Memorandum of Articles without the agreement of the VC Borrowings Borrowing limits are also likely to feature as a condition of the VC investment in order to ensure that investment is not diminished or threatened. Underperformance Often a VC will impose an underperformance condition upon the business directors. This will state that, in the event that the business does not perform to agreed and pre-determined financial and performance targets, the VC will have the right to force a business sale or, alternatively appoint additional directors to the board and dispense with the services of the current directors. 2011 option As noted, in 2011 the VC has the option of cash or shares. The basis for making this decision will depend upon the return on equity employed (Reuvid 2002).

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