In a series of articles we will be focusing on 2 sets of issues which are relevant to the business of multimedia. First, intellectual property rights and rights clearance. Second, structuring and financing new businesses.
STRUCTURING AND FINANCING A NEW BUSINESS
You may have a great concept for a new product. You may have spotted a new business opportunity, or a business opportunity that has great commercial synergies with your existing business. Alternatively, you may have just won a franchise to conduct a particular business. You may be anything from a large multi national company to an individual with aspirations of becoming the next Bill Gates. The same questions arise. To what extent do you need to raise money to develop and operate the business? And how are you going to raise this money?
Multimedia product development can be relatively costly. Assuming you cannot finance the whole of the new business out of your own resources, you will need to borrow money from others or to persuade others to invest in the new business or to contract others to conduct part of the business for you.
Developing the business idea
An elementary issue is whether the business concept itself is sufficiently well developed. If you have an idea for a new product, for example, do you have a prototype that you can demonstrate to your prospective investors/lenders? If not, can you convince them that the product will work? Can you persuade investors that there is a market for your product or services? Do you have the know how and facilities to develop the product and to get it to your customers? Are you likely to have problems in retaining employees with the appropriate creative and management skills, or have you already identified key employees who are willing to get involved in the business? In order to develop the business quickly and efficiently, a strategic alliance with a developer, manufacturer or distributor may make a lot of sense.
How much money do you need? You will need to draft a business plan projecting the revenues and cash requirements of your business for a minimum of five years, so as to demonstrate to investors that the structure you have chosen "stacks up" and will give investors/lenders the returns they require.
Your business structure may take one or a combination of many forms, including:
- a joint venture, involving a number of participants investing in, for example, a new company or partnership
- a contractual cooperation arrangement, such as a manufacturing, production, distribution or research and development agreement with another established business.
Your financing structures may take one or a combination of many forms including:
- secured or unsecured borrowings
- equity finance, whether ordinary or preferred equity.
Alternatively you may choose to sell out or license to an established business. The potential rewards are likely to be less, but the business risk is also less and in some cases this may be your only choice.
Debt or equity?
In many cases, successful financing will involve a mix of both debt and equity - in practice you are unlikely to find lenders willing to provide all the development and working capital for your new business. This is for various reasons, including the following:
- borrowings above a certain level will raise the question as to whether the borrower can service them out of current cash earnings. Lenders often expect a minimum profit before interest and tax to interest cover ratio of 2:1
- to achieve the optimum level of gearing (debt: equity ratio).
- too much debt may make the balance sheet, at least, appear weak, which may for example have an adverse effect on suppliers credit terms.
- equity investors ordinarily expect a higher return than bank lenders and borrowings can increase the return on equity (assuming more money can be earned with the asset purchased with the debt than is paid to service the debt).
- lenders will expect an asset cushion to reduce the risk of losing money upon a default.
Consequently it will be necessary to arrive at a view of the appropriate level of equity and debt finance for your business, after discussion with potential lenders and investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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