The business concept
A clear description of the business is given, with the partners choosing to acquire a franchise as opposed to starting their own business. Right from the idea stage to the manner in which the business was acquired, an intricate outline of the elements of the business is given.
The market for ‘gelati’ is still grim from the description, although since it is a consumable, it is expected that most of the residents of the State are potential customers. The partners expect to establish a niche in the North Eastern location of the State.
The Opportunity
The three partners were in need of purchasing a business entity. ICEDELIGHTS was a prime opportunity for the partners since the partners were seeking to buy a business, which was already running. After brainstorming on the most opportune approach to venturing into business, the decision to buy was most desirable. Based in Boston, ICEDELIGHTS was a venture selling beverages, pastries and frozen desserts.
The diversity in products and locations made it possible for the partners to exercise creativity in satisfying the consumer needs. The fact that the company has already ventured into franchising indicates that ICEDELIGHTS had potential for expansion into the global market.
The company has already acquired a niche market, owing to the quality of products. In addition, ICEDELIGHTS has operational systems in place, including production, accounting, training and development, controls, store management and design. In essence, the company was poised for expansion at the right moment.
The players
The company is comprised of franchisor and franchisee. The franchisor is primarily providing real estate and the product, which is produced centrally and distributed to the points of sale. Real estate elements include the location where the franchisee will set up location.
The franchisee is to provide capital for the acquisition of the locations for distribution, operating capital as well as the operational requirements. In providing this, the franchisee has sought investors who are expected to provide equity and debt capital.
Perfect fit for the partners
Mark, Paul and Eric are a perfect fit for each other. While mark exudes risk aversion, Paul and Eric are willing to take risks head on. All three partners have experience consulting for financial firms making them expert with handling financial matters. Mark is risk-averse, preferring to take on the lowest possible risk in any venture. Paul and Eric were however not afraid to bear certain levels of risks.
On one hand, it was a perfect fit for all partners since views of all partners resulted to a balanced view of the risk factors associated with each decision to be made. However, there was always the possibility that disagreements were in the offing, owing to the disparity in risk aversion across the board.
All partners sought independence and the ability to steer their own creation. The ability to create financially rewarding ventures was their utmost motivation. As entrepreneurs, the three were motivated to build a business based on their ideas.
Viability of the Franchise
Franchising in Florida is a desirable move aimed at acquiring a market that is underutilized. Although there exists a number of competitors offering related products, the product to be introduced by the three partners is novel. Owing to the success of the product in other locations, the partners are counting on their expertise and product characteristics to achieve their objectives.
Discuss the market chosen for development
The acquisition of franchise in Florida was a prime reason for the success of the company. First, the climatic conditions of the state are well matched for the product. How sunny weather made it possible for demand of the product to be high across the year.
In addition, the location has a high population, making it possible for expansion of markets within the State. Additionally, since there was less competition, it was possible for the company to enjoy exposure to consumers without the need to develop organic competitive advantage, especially in the starting stages. The lack of competition eliminated the most prominent barrier to entry for any organization.
Florida flourishes on mall-based businesses, which involve a one-stop shop. Although this makes it easier to attract consumers, it is necessary to establish a prime location in the malls for exposure to consumers.
The three partners did not have tangible information on the market in Florida, and were not even aware of the competition on site. As a custom-designed product, ‘gelati’ was unique in taste and composition, making it necessary for the partners to establish a market for the product by introducing its uniqueness to potential customers.
The financial Plan
The partners require a total of $825,000 to take the company into operational status. However, franchising fees of $75,000 are required upfront. In addition to acquiring locations for operations and the working capital, the franchise requires additional capitals for acquiring patents and licenses for operations in the country. Other overheads and material acquisition funds also come into play.
Initially, the company sought to raise the capital through equity-based sources, but was also keen on acquiring debt capital due to its advantages. Although venture capital is available, the risks associated with the source have made it an unviable source. As a result, the company has decided to offer debentures redeemable in five years.
This will offer the company an opportunity to repay the debts through the projected revenues from operations. The possibility of sourcing sufficient revenues to buy out the debt is clearly painted in the projections for expansion and sales volume in the market. Most of the projections are based on market data, which is yet to be tested, making them weak bases.
The financial plans postulated in the balance sheet and sales revenues are slightly limited on prudence. The company expects to achieve compound growth in sales over the first ten years.
Unless specific emphasis has been put in assessing the possibility of future competition and changes in market conditions, it is necessary to remain prudent. The company has remained sensitive to inflation, which makes it possible for the company to inculcate the impact of time value of money.
Recommendations
It is necessary for the partners to establish reliable sources of back-up capital for operations. In most instances, the starting years of a business are associated with numerous challenges and requirements, most of which make it impossible for profitability to be achieved.
In fact, it is necessary for the first three years to be viewed as loss making period, in order to ensure that the partners handle all the preparatory elements of starting a business before settling to profitability.
Secondly, it is imperative for the partners to establish a market for it product through extensive marketing. Depending on whether they will be absorbed into the mall business, it is necessary for advertising and sensitization programs to take root before they decide to expand according to the ten-year plan.
The use of diverse sources of capital is a prudent move. However, emphasis should be placed on acquisition of equity-based capital since debt-capital is not as competitive. Equity capital should be the basis of expansion, since the process of acquiring debt capital is less intricate.