Unit 1 Introduction to Business Management
Unit 1 Practice 10 marker
Ben Bright and his stepdad Robert were both drama majors at University. After completing his undergraduate degree, Ben enrolled on an MBA program* as he wanted to start his own theatre company, with the objective of making profit. Since Ben had always gotten along well with Robert, they decided to start their own theatre company together.
Robert, (recently retired) sold some shares he owned for the start-up-funds for their new drama production company, Dulwich Divas (DD). DD was initially set up as a partnership, with Ben and Robert as equal partners. DD have been operating for two years but have struggled to make a profit. In general, Ben is more focused on the business side and Robert is more interested in the creative side.
Ben believes the only way to fix the problem of no profit is to invest heavily in new shows and advertising. However, Robert and Ben have exhausted their start up and personal funds.
Recently, the pair were denied a bank loan for £10,000. Ben has asked Robert (and his mother) if they would consider using their home as an asset (collateral) to borrow against. However, Robert is not enthusiastic as he perceives there to be a high degree of risk associated with this course of action.
Ben and Robert arranged an appointment with an independent financial advisor (IFA) to get some advice. The IFA noted that Ben and Robert have different objectives and that Ben is qualified but lacks experience. It was also noted that Ben seems to possess more drive than Robert and is comfortable taking much larger risks than Ben. However, it was also noted that their business relationship is generally positive and that each benefits from a different skill set. Both Ben, Robert and the IFA agreed that an injection of capital would be useful, but that a detailed business plan would need to be completed before further advice could be given.
KEY TERMS FROM THE CASE
10 MARK QUESTION FROM THE CASE STUDY
- Discuss whether Ben and Robert should become a private limited company (Ltd) [10]
SUGGESTED ANSWERS TO PRACTICE 10 MARKER
Unit 1 Practice 10 marker
In terms of scoring 10 marks, the answer has to examine the proposal. This starts with a definition and an explanation of what the difference is between the existing and new structure is!
What are the advantages (potentially) and disadvantages (potentially) of each
The answer should also be balanced (not favouring one or other course of action)
Full marks cannot be achieved without plenty of application! That is, ‘direct reference’ to the case study material!
There should also be a final conclusion to indicate you have made a decision!
EXAMPLE ANSWER
Private limited company (Ltd) could be useful as it offers limited liability, which limits the potential loss of investment to the amount invested. This would mean that personal assets would not be at risk such as “consider using their home as an asset”! A Ltd also offers benefits such as continuity (in the event of the death or retirement of one or both Robert and Ben). A greater number of investors who can be issued shares to in return for investment. There are also tax advantages of becoming an Ltd. However, some problems exist such as being more costly to establish and losing a degree of privacy as they are forced to publish annual accounts!
Having said this, a partnership is still a useful business structure. Ben and Robert could add additional partners or a silent partner, whereby somebody invests in the business, but does not wish to work or be involved on the business side. The pair retain their privacy and can expand and access greater investment to help solve their money problems in the short term. However, more partners does introduce problems such as the need to generate more cash to pay investors, problems in managing multiple people and a possible loss of control.
The ultimate decision to become a Ltd depends on whether Ben and Robert can agree to take a chance because it seems that without additional funding, their journey working as a partnership may be coming to an end. This seems like it could be the biggest problem currently. As the case states, “DD have been operating for two years but have struggled to make a profit”. Moreover, “However, Robert and Ben have exhausted their start up and personal funds”.
Whilst additional funds from becoming an Ltd could be useful, other problems (which can be seen in the following two quotes ) may already exist, “In general, Ben is more focused on the business side and Robert is more interested in the creative side”. Moreover, “However, Robert is not enthusiastic as he perceives there to be a high degree of risk associated with this course of action”.
On balance, the pair have to decide whether to accept the judgement of the IFA, “that an injection of capital would be useful, but that a detailed business plan would need to be completed before further advice could be given”. The benefits of a successful Ltd don’t seem to clearly outweigh the possible advantages of remaining a partnership but adding more members! To me, the key aspect is that Ben and Robert agree on their apparent differences and approach and move forward together. This of course depends on external factors such as the state of the economy at the time! I would choose to remain a partnership structure and seek additional members to invest or a silent partner as this simplifies changing the structure at a time when other considerations (Ben and Robert’s agreement on other issues) needs resolving.