Case Study: Looking for Capital

When Joyce and Phil Abrams opened their bookstore one year ago, they estimated it would take them six months to break even. Because they had gone into the venture with enough capital to keep them afloat for nine months, they were sure they would need no outside financing. However, sales have been slower than anticipated, and most of their funds now have been used to purchase inventory or meet monthly expenses. On the other hand, the store is doing better each month and the Abramses are convinced they will be able to turn a profit within six months.

At present, Joyce and Phil want to secure additional financing. Specifically, they would like to raise $100,000 to expand their product line. The store currently focuses most heavily on how-to-do books and is developing a loyal customer following. However, this market is not large enough to carry the business. The Abramses feel that if they expand into an additional market such as cookbooks, they can develop two market segments that, when combined, would prove profitable. Joyce is convinced that cookbooks are an important niche, and she has saved a number of clippings from national newspapers and magazines reporting that people who buy cookbooks tend to spend more money per month on these purchases than does the average book buyer. Additionally, customer loyalty among this group tends to be very high.

The Abramses own all of their inventory, which has a retail market value of $280,000. The merchandise cost them $140,000. They also have at a local bank a line of credit of $10,000, of which they have used $4,000. Most of their monthly expenses are covered out of the initial capital with which they started the business ($180,000 in all). However, they will be out of money in three months if they are not able to get additional funding.

The owners have considered investigating a number of sources. The two primary ones are a loan from their bank and a private stock offering to investors. They know nothing about how to raise money, and these are only general ideas they have been discussing with each other. However, they do have a meeting scheduled with their accountant, a friend who they hope can advise them on how to raise more capital. For the moment, the Abramses are focusing on writing a business plan that spells out their short business history and objectives and explains how much money they would like to raise and where it would be invested. They hope to have the plan completed before the end of the week and take it with them to the accountant. The biggest problem they are having in writing the plan is that they are unsure of how to direct their presentation. Should they aim it at a bank or a venture capitalist? After their meeting with the accountant, they plan to refine the plan and direct it towards the appropriate source.

1. Would a commercial banker be willing to lend money to the Abramses? How much? On what do you base your answer? How has this changed in the past five years?

2. Would this venture have any appeal for a venture capitalist? Why or why not? What are venture capitalists looking for that this venture contains, and what does it not contain? What could the founders do differently to make it more appealing?

3. If you were advising the Abramses, how would you recommend they seek additional capital? Be sure to consider at least three methods of raising capital in your answer. You should respond with a complete answer, including a comparison of each.