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Best source of equity capital

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Christine Hernandez is in the process of launching a restaurant. She has never owned a restaurant before, but she has worked in two of the best restaurants in town. Starting out as a hostess, Hernandez developed a special knack for the business and quickly worked her way up to manager. Her 18 years of experience have given her a solid foundation for running a restaurant.

Hernandez has worked with a counselor from a nearby small business development center and a counselor from the Service Corps of Retired Executives to prepare a business plan. She asked two other consultants and an accountant to review the plan, and she incorporated their suggestions into the finished product. Hernandez has personal savings of about $15,000, a paid life insurance policy worth $100,000 that her grandfather bought her when she was born, and a small rental property with no mortgage worth about $75,000.

She is considering how to finance her business start up. She needs $165,000 to start her restaurant. She has chosen a location in the center of a major city. The neighborhood is economically depressed, but she thinks a trendy restaurant will draw attention, regardless of the location. Also, her initial rent and utility expenses will be low.

What will be her best source of equity capital? Why?

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Her best source of capital will be to raise funds from an angel investor or venture capitalist by diluting stake in the venture and providing some stake to the ...

Solution Summary

Christine Hernandez is in the process of launching a restaurant. She has never owned a restaurant before, but she has worked in two of the best restaurants in town. Starting out as a hostess, Hernandez developed a special knack for the business and quickly worked her way up to manager. Her 18 years of experience have given her a solid foundation for running a restaurant.

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Finding Financing

Rhonda Allegro has spent most of her spare time in the last 10 months either in the library at the local university or at the Small Business Development Center (SBDC) housed there. A little more than a year ago, she decided to launch a retail music store specializing in musical instruments, supplies, and hard-to-find sheet music and music books. She also plans to set up a "marketplace" between music students and instructors, collecting a finder's fee for each match-up. Rhonda set a goal of developing a complete business plan within a year, and now, 10 months later with her plan completed, she is ahead of schedule.

Rhonda was the creator of the plan, but she had plenty of help building it. She used the services of the university's SBDC, a friend who is an accountant at a Big Six firm and a friend who is an attorney. She thought that her plan was a good one, but she was excited when the SBDC counselors encouraged her to enter a statewide competition sponsored by a local venture capital firm for the best business plan. She could hardly believe it when her plan won in the retail division!

Now, all that remains is launching the business. Rhonda has $75,000 that she plans to invest in the business, but her financial forecasts indicate that she will need another $650,000. Two banks already have turned her down, both citing the risk involved in small business startups. One of the SBDC consultants suggested that Rhonda consider searching out equity capital. "That sounds promising, but how do I find equity investors? Where do I start my search? What are my options?"

Answer Rhonda's questions.
Which equity sources would you recommend to Rhonda? Explain.
What are the advantages and disadvantages of using equity capital?

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