Questions
This activity submission requires you to analyse one of the two case studies introduced in Module 1: DrAIve or UnBlockAfrica.
Note: You must use the same case study that you chose in Module 6.
To complete this activity, use:
- The DrAIve and UnBlockAfrica resources provided from Module 1 to Module 6.
- Your answers to the Module 6 activity submission – you will need to refer to the board of directors that you recommended.
The venture that you have chosen – DrAIve or UnBlockAfrica – has realised that they will not be able to settle their wage bill next week, as they are running out of cash. The venture needs to find alternative cash options. If the employees are not paid on Friday, they will not return to work on Monday. Suppose you had decision-making power in this crisis scenario, and answer the following questions.
Question 1
Consider the advantages and disadvantages of accepting a down round at a low valuation. What is the lowest pre-money valuation you would accept? What alternative financing strategy would you pursue? How would you go about doing this to minimise the potentially negative impact of these decisions?
(Write 200–250 words)
Start writing here:
For Unblock Africa
The lowest pre money valuation which would be considered by the stakeholders of the company would be 9625555. This is the amount which can be accepted when raising the funds through the down round valuation. The down round valuation leads the company to accept the lower valuation for the company as inspectors provide discount to the company due to variable factors. This is clear that the down round financing creates a negative impact on the company and its management. To avoid the down round valuation, the management can agree to raise funds with mezzanine debt or convertible debt from the banks. This would however, would require higher interest rates and mortgage of inventories or accounts receivable but would save the company from the down round financing.
As it is clear the down round financing would dilute the stakes of the founder and the initial investors along with lower valuation of the company. The raising of funds through higher level of debt, would be beneficial in two ways which are that the company would be able to raise the funds which it requires. While the second it would send a positive message to the investors and the employee that the founders have faith in the company and the company can generate enough cash flow to meet the financial expense. This would lower the negative impact of the cash crunch which is being faced by the company due to high burn out rate.
Question 2
Suppose that, after six months of pursuing a turnaround strategy, the company’s position has not improved. You are asked to outline a proposal to the board of directors for shutting down the business.
Question 2.1
Describe the advantages and disadvantages of shutting down the company.
(Write 150–200 words)
Start writing here:
For Unblock Africa
The shutting down of a company is one of the most challenging decision which has to be taken by the management of the company. The management needs to consider various factors when making the decision and thus the advantages and disadvantages is highlighted in the following points.
Advantages:
- The company can stop making losses and has learned valuable experience which can be used in other venture of the company.
- The existing losses are tabulated and the new valuation of the company by reducing the debt which is owed is paid back to the investor. All the investment of the investor is not lost in the business.
- The business plan which had been made has certain flaws which has been understood by the management which can be rectified and the company can enter the market with a new business plan.
Disadvantages:
- The company and the employee of the company have lost credibility in the market.
- The funds have been lost by the investors in the project which cannot be recouped.
- Business Relations have been spoiled due to the shutting down of the company, leading to a loss in reputation of the investors or resource providers.
Question 2.2
Explain the three key action items that will be required for a managed shut down.
(Write 150–200 words)
Start writing here:
For Unblock Africa
The three key action which is taken for the managed shutdown of a business is provided in the following points.
- The 1st point to be considered is to plan the closure of the business which would require certain help from experts in planning out all the arrangements of the company. The accountants would need to prepare the outstanding receivables and dues which would be need to be recovered and paid. Also all the stakeholders would be informed for the closure to make necessary alternative arrangements in the mean while.
- All the assets if any would be systematically liquidated, and the debt providers would be paid the dues. The maximum disposal value for the assets would be generated so as to generate the highest liquidation value.
- The last step would be to explain the stakeholders the reason for the shutdown and the positive effects of the shutdown. The cause of the shutdown would be highlighted to the stakeholders to remove any negative relations.
These three actions are important for the managed shutdown of a company which is taken by the company.
