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Accelerator Systems, a company which mainly specialised in panels for lifts and
reservoirs. They had little knowledge of power systems. Herbert Engineering had
approached Accelerator to investigate whether it would be prepared to invest in advanced
control panels. Accelerator had been prepared to lend £100,000 at 5 per cent, over 3
years, on the understanding that Herbert would enter into an agreement to only use
Accelerator systems in their panels for a 10 year period, providing that the costs of
Accelerator equipment was no more than 10 per cent above the average of competitive
systems.
Bank borrowing. The bank had become increasingly concerned about the level of debt
that the company was carrying. It refused an expansion in the borrowing limit, and
proposed that Herbert reduced its debt by 10 per cent in the coming year. Though the
pressures on the company were not yet severe, the two directors thought that the new
financial plan should include a reduction in the borrowing levels on that basis.
Local investors. Other companies had been successful in raising finance through
advertisements in the local newspapers. Typically these deals had involved selling around
20 per cent of the equity of the business on the basis of a price earnings ratio of 12. One
of the most active local investors had indicated an interest in taking such a stake in
Herbert in return for appointment as a director and a semi-active involvement in the
company. The local investors would expect to receive a 5 per cent dividend on their
investment per year.
Venture capital. Herbert Engineering had finally considered the option of venture capital to
provide the finance that would be required for the development of the control systems.
Venture capital firms would be looking for around 35 per cent of the company in return for
an investment of £400,000. They would expect to be able to sell this investment at the end
of 5 years with a target capital gain of 120 per cent. The venture capital firms were not
interested in receiving any dividend payment - they expected to make all their gains in
capital growth over the period of the investment.
Action
What should Herbert Engineering do to develop an effective marketing policy?
What controls need to be introduced?
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