Chapter 5

Growing the Business

Copyright © 2007 by John Wiley

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 Chapter Overview
• Need for Growth
• Shareholder Value
• Benefits of Growth
• Growth Strategies

Copyright © 2007 by John Wiley

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 Need for Growth
• Essential to a company’s success
– Private company owners expect profits, cash
flow, and ROI to increase
– Stockholders expect the price of their stock to
rise
• Growth company’s earnings increase at
least 15% each year

Copyright © 2007 by John Wiley

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 Shareholder Value
• Shareholder Value = Market Value
• Market Value
– Public Company
• Current market price of common stock multiplied
by number of shares outstanding
– Private Company
• Sale price of the company on the open market

Copyright © 2007 by John Wiley

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 Public Company Goals
• Increase earnings per share (EPS)
– EPS = EBIDTA / Shares of Common Stock
• Increase the company’s stock multiple
– Multiple = Current Market Price / EPS
• Increase the market price of common
stock

Copyright © 2007 by John Wiley

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 Risk and Reward
• Investors are risk averse
– The greater the risk, the higher the ROI
demanded by investors

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 Private Company Goals
• Increase cash flow
• Generate a favorable return for owners

Copyright © 2007 by John Wiley

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 Benefits of Growth
• Clear career paths for employees
• Attract qualified employees
• Increase market share
• Limit new competition
• Diversify risk

Copyright © 2007 by John Wiley

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 Growth Strategies
• Increase sales and Productivity of Existing
Properties
– Increase Profit Margin
– Increase sales
– Reduce expenses
– Increase labor productivity
– Reduce credit card commissions

Copyright © 2007 by John Wiley

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 Growth Strategies
• Expansion of Physical Facilities
– Focus on current or new markets
– Requires large quantities of new capital
– Earnings of additional assets must be greater
than the company’s cost of capital
• If earnings are lower, earnings per share are
diluted

Copyright © 2007 by John Wiley

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 Growth Strategies
• Franchising
– Sell the rights to a brand in a specific
location/market for a stated number of years
– Franchisees pay:
• Franchise fees
• Franchise royalty fee
• Ancillary services
– Marketing, training, purchasing fees, etc.

Copyright © 2007 by John Wiley

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 Franchising
• Benefits
– Greater distribution system
– Rapid growth without large amounts of capital
– Higher profit margins
• Disadvantages
– Risk of not being able to control brand standards
– Unable to control quality and consistency of the
product and services

Copyright © 2007 by John Wiley

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 Growth Strategies
• Management Contracts
– Operate properties for owners without management
capabilities
– Available primarily to lodging companies
– Fees
• 3% to 5% of total sales
• Incentive fee based on a percentage of operating profit
– Disadvantage
• Risk of contract being terminated

Copyright © 2007 by John Wiley

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 Growth Strategies
• Mergers and Acquisitions
– Available to large public companies
– Must have substantial amounts of capital
– Funded by:
• Debt
• Existing equity
• Selling new shares of stock
• Bartering
Copyright © 2007 by John Wiley
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 Growth Strategies
• Initial Public Offering (IPO)
– Utilized when:
• a company is ready for rapid growth
• a company’s potential future value is much greater
than its current value

Copyright © 2007 by John Wiley

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 IPO Process
1. Investment banker manages process
2. Law firm writes prospectus
3. Accounting firm prepares certified audits for
prior three years
4. Road show
5. Stock offering is priced
6. Management meets with the stock exchange

Copyright © 2007 by John Wiley

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 Investment Banker
• Plays important role in the IPO process
– Before stock is sold
• Helps value the company
• Establishes a price for the stock
• Manages the selling process
– After stock is on the market
• Maintains a market for the stock

Copyright © 2007 by John Wiley

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 Managing a Public Company
• Management at public companies have
many responsibilities
– Required to file reports with the SEC
– Deal with Wall Street research analysts
– Must report to:
• board of directors
• stockholders

Copyright © 2007 by John Wiley

& Sons, Inc. All rights reserved