Financial Management of Smaller Firms
Course Number 1452
Professor Richard S. Ruback
Senior Lecturer Royce Yudkoff
Fall; Q1Q2; 3 credits
This course is suitable for anyone who is interested in owning, managing or investing in smaller businesses. The course is also suitable for students seeking to learn more about how finance is used in everyday practice in businesses.
This course is a prerequisite for the field course Entrepreneurship through Acquisition, which is taught in the Spring and focuses on the process of buying a smaller business (CLICK HERE for insights of former students who acquired smaller firms after graduation).
The course focuses how to manage smaller businesses with a focus on the financial aspects of buying, growing and selling these businesses. The cases are designed to give students practical knowledge that will be immediately helpful if they plan to own or manage a small business, provide consulting or financial services to these businesses, or invest in smaller businesses. These smaller businesses are privately owned, are typically led by a CEO/entrepreneur supported by a narrow management bench (often without a meaningful CFO), produce a service or product for which a current profitable business model exists (as distinct from many VC-backed developmental businesses), and frequently the businesses are of a scale that they can be acquired and owned by individuals instead of institutions or families. The managerial and financial challenges for these firms are different from those of larger, public firms and often require a different approach because of their small scale, lack of liquidity and the difficulty of attracting and deploying capital. The careers of small business entrepreneurs are also very different from the employees of larger firms, and we explore those differences through numerous guests and a few cases that focus on the pros and cons the career choice.
Course Content and Organization
The course will have three modules:
The first focuses on how to buy a small business. We begin with a case of an HBS MBA who chose to purchase a small business instead of pursuing a more traditional career path. The case tracks his search process and highlights the complexity of evaluating a small business opportunity. That leads into the second case in which a local business broker will present a distressed smaller business that can be purchased with limited resources. We also discuss acquisitions by recent MBA graduates that used search funds. We will then explore the financial infrastructure of smaller firms by examining financial institutions that specializes in funding smaller firms.
The second module focuses on how to successfully manage the financial aspects of smaller firms. We explore capital budgeting in these capital constrained firms because the simple rules like NPV don't work without easy access to funding. We will also explore the difficulty of growing these firms and explore which business models are more likely to succeed. And, of course, we will explore how these businesses finance themselves as they grow. These smaller firms, unlike bigger firms, often face tradeoffs between liquidity and profitability, and a common feature of successful firms seems to be a willingness to sacrifice profitability for liquidity. These tradeoffs are particularly relevant to acquisitions made by recent MBA graduates as they navigated through the Great Recession.
The third module will focus on how to sell a small business. A potential sale presents a series of interesting questions involving the timing, process and structure of the sale. Even choosing the buyer is a fascinating question because these smaller businesses usually represent a very substantial portion of their owner's wealth and the sales are often very personal. Also, the sales are generally to bigger companies with very different cultures and processes. We will explore cases in which just a portion of the firm is sold and the owners continue to manage the firm as well as cases in which the owners sell all of their interests. We will explore how to evaluate different offers that have different features; particularly payments that are contingent on post-transaction performance such as earn outs.