Executive Summary
This project proposal is presented to source for financing of opening of a Papa John’s franchise. The proposal includes a critical analysis of all the estimated costs, scheduling and justification. These costs are matched against the forecasted revenues from the projects over a five years period.
The completion of acquisition of Papa John’s franchise will grant the franchisee the exclusive rights to operate the business of making and distributing pizzas under the Papa John’s franchise.
The acquisition of this franchise will see the operations begin in less than a month. This is because the Papa John has an offer of up to $50,000.00 worth of free equipment upon acquisition of the franchise rights and signing of the agreement. The rest of the major costs will be leasing of a building which is readily available.
Other operational costs are incurred once the business in running and these can be met by the working capital float. The process of acquiring the franchise rights will take up to a maximum of two weeks and operations can begin in a month’s time once the funds are availed and the materials and equipment are in the premises.
The expected revenue of this business is $600,000.00 in the first year in the most optimistic scenario, $500,000.00 in the most probable scenario, and $400,000.00 in the most pessimistic scenario. The revenues are expected to grow at a rate of 10% per year for at least the next ten years.
The fixed costs are predicted to be about $600,000.00 in the first year and then dropping to $200,000 per year for the next foreseeable future. The other variable costs are estimated to be about $100,000.00 per year afterwards. Having all this information, the proposal, therefore, seeks financing for the establishment of the restaurant franchise.
Introduction
This proposal is submitted with the intention of sourcing for the financing of the acquisition of Papa John’s franchise. Papa John’s Pizza is a restaurant that has been in the business of making and distributing pizzas for the last two and half decades. Making pizza from better ingredients has been Papa John’s commitment since the first day of the opening of the first restaurant.
This has resulted in one of the best quality pizzas in the world. The brand has consequently grown to be the favorite among many consumers. As such, Papa John is seeking to expand the brand presence to possibly all the countries of the world. This franchise is intended to be opened in a small town of Glenwood springs, Colorado.
Currently, the town has no pizza outlet yet residents are great consumers of pizzas. The completion of this franchise acquisition will see the franchise acquiring the first mover advantage and take an estimated 90% of the pizza consumers in the city. This will go a long way in establishing a strong goodwill in among the town residents.
Customer Deliverables
Papa John’s pizza has a quality proposition to the customer: “making quality pizza using better ingredients.” This dedication to the quality of the product ensures that customers are attracted to the products of the company and subsequently, customer loyalty is gained. The customers can also expect a twenty four hour home delivery service. The customer is always the major focus in any profit making business.
This is because the customer consumes the products and without the customer, no company would exist. This realization of the importance of customers has compelled Papa John to have a mission that is customer focused.
The consumption of the pizzas from the restaurant will not only benefit the business owner but will also contribute to the social welfare of the Glenwood springs community. This is because the franchise has a “5% profit apportionment to the society” policy. This will, therefore, ensure that good external relations are created and maintained between the company and the community around it.
Project Objective statement
The main objective of this project is to open a Papa John’s franchise restaurant in Glenwood town, Colorado. This is aimed at capturing the consumer market in the town while delivering superior quality pizzas. The franchise will also offer employment opportunities for around one hundred people once it is fully operational.
Since this will be the first pizza delivering restaurant in town, the revenues are estimated with a high degree of accuracy. A recent market study indicates that an opening of a pizza restaurant in the town would certainly be a viable business venture with a success degree of 95%. The financing of this project would therefore ensure that the opportunity available in the market is exploited.
Franchise success criteria
Papa John’s franchise restaurant, being a private profit motivated business will have its success measured on a number of scales. The most important success scale is having a positive Net Present Value after the first five years upon which the project financing is sought.
Net Present value is a finance appraisal technique that discounts the future cash flows of a project (Don, Richard, Steve, & John, 2002). If the Net Present value is more than zero, the project is acceptable and its chances of success are higher than when it has been below zero.
The other success measure used to appraise the project is the projected revenues. The project needs to operate at least under the most probable scenario so as to ensure that the profits earned offset the costs incurred and having residual funds as profits. This is highly achieved by ensuring that operational measures put in place are adhered to as well as ensuring rigorous marketing activities.
The other success criteria used is the controllability of costs. The costs to be incurred by the project ought to be estimated with a high degree of accuracy. This will ensure that the chances of contingent expenses are reduced.
Costs play a major role in appraising the success of the project since the profits margins can be estimated with a high degree of certainty. As such, the estimated costs will offer insightful information about the success possibility of the business.
The final success criteria used is the adaptability to the environment. A business usually operates under two environments: internal and external. The internal environment includes all the factors that contribute to the organization’s service delivery. They include resources, both tangible and intangible, processes, structure and the organizational culture.
The internal environment is important in formulating business strategy since it consists of factors that are controllable by the management. The external environment consists of those remote factors which are outside the control of the company.
As such, the company must ensure it crafts its strategy that will ensure that it fits within the external environment (Geoff, 1996). Papa John’s restaurant will, therefore, be regarded successful in this regard if manages to take advantage of the opportunities presented while avoiding the threats that the environment presents.
Capital cost Estimates
The capital expenses for this project involves leasing building, equipments and other assets such as motor vehicles. The following table gives the breakdown of the fixed costs for the five years:
Cost estimation techniques
The cost estimation technique used in this project is the Method of Moments. This is a project costs estimation technique that expresses the different costs associated with the various cost items (Quentin & Joel, 2010). The advantage of this method of estimation is that the total project costs are assumed to follow a normal distribution based on central limit theorem.
The method is helpful in deriving the contingency from the normal distribution. This can be helpful in tracking the areas where costs were over incurred or under incurred (Quentin & Joel, 2010). This is useful in the future funding of the projects. Using this cost estimation the following table analyses the different cost items as a percentage of the total costs.
Cost Analysis
The above projects costs have been divided into two different classifications: fixed and variable costs. The fixed costs consist of lease, equipment, motor vehicle and contingent. The allocation of a total of $700,000 on lease for the five years comes from the need for premises that will not only host the restaurant but also the offices. The amount allocated for lease is 26% of the total project costs.
This is a desirable fraction of the total costs since building of a new plant or purchasing a building would push the costs high. The lease requirements state that the first year the amount needed will be $300,000 which will fall to $ 100,000.00 per year for the next five years.
Equipment takes up 11% of the total costs of the project. This is due to the various purchases of the new equipment for the restaurant in addition to the $ 50,000.00 worth of equipment given for free by the franchisor upon signing the agreement.
The equipment costs are justifiable since the company recovers the full amount spent on capital expenses through the capital tax allowances while submitting the income tax. Motor vehicles will be used as the premium means of transport for both the raw materials and the products. The initial costs will, therefore, be $150,000.00 and then drop to $25,000.00 per year for the next four years.
An analysis of the variable costs indicates that the project’s variable costs majorly consist of salaries, cost of goods sold, and administrative expenses. These expenses are, therefore, justifiable since they are pegged on the projected output for the five years. The largest percentages of costs come from the cost of goods sold. This comes from the purchases and the support activities that bring the product to a consumable state.
Cost Assumptions
Cost assumption is an important aspect of any cost estimation report. It helps understand the rationale under which the costs were arrived at. Cost estimation also gives a clear interpretation of how the costs were arrived at during the preparation of the projects costs (Nicholas & Herman, 2008). There are different cost assumptions that exist for different cost scenarios.
The most common cost assumptions are that the costs always follow a linear format. This is an assumption that seeks to streamline the change in the costs over the different periods under which the project is to be appraised. In the Papa John’s restaurant franchise financing proposal, there are several cost assumptions that have led to the nature of cost estimates.
The first assumption is that the costs will follow a linear distribution over the five years provided. This assumption typically means that over the next five years the costs are expected to remain unchanged.
This assumption, however, has several limitations including the fact that in real practice, costs cannot be the same over different periods. This is because of the different market conditions that require firms to spend on the unseen up-comings. This weakness is, however, catered for by the provision of the contingency costs which come under others.
The next cost assumption is that the fixed costs will remain the same for the different cost items over the five years. This assumption helps in having a consistent cash flow that can easily be appraised. This assumption is, therefore, a desirable assumption since it helps in having visual appraisal of the projects without having the need of doing extensive detailed report.
There is an assumption that the salaries will remain constant over the next five years. This assumption, therefore, means that the employees will either receive constant pay for the five year period without the possibility of salaries additions or the work force may be reduced as the business gets less labor-intensive thus reducing the number of workers and increasing their pay.
Project Appraisal
Project appraisal is a financial activity that is carried to evaluate the feasibility of an intended project (Linn, 1981). The most common methods of project appraisals are the discounted cash flows methods which include the Net Present value (NPV), the IRR, and the profitability index.
The method used in this case in the Net Present Value. This method is used in all three possible scenarios: the optimistic, the most probable and the pessimistic.
Net present value (the most optimistic)
Here the Net present value of the project is positive and therefore the project acceptable.
Net Present Value (most probable scenario)
The most probable scenario results in a positive NPV as well. This is, however, less than that of the most optimistic scenario.
Net Present Value (the pessimistic scenario)
The scenario above shows the expected outcome if the franchise fails in the market. This shows a negative net present value of $ -335,136.00. This scenario shows that if the expected revenues turn out as indicated, the project is not feasible.
However, the project has a positive NPV from the most probable scenario and should, therefore, be considered for acceptance. In appraising the above project, the cost of capital is set at 12%. This is because it is the required rate of return that money lenders are willing to earn as return to their cash lent out or invested. This discounting rate has been used in all possible scenarios.
Project Schedule
The project is divided into two stages: the pre-take off stake and the business stage. The first stage indicates the resources and inputs needed to ensure that the restaurant starts up while the second stage shows the timelines set for the restaurant to become fully operational.
References
Don, D., Richard, I., Steve, H., & John, H. (2002). Capital Budgeting: Financial Appraisal of Investment Projects. Cambridge: Cambridge University Press.
Geoff, R. (1996). Programme Management Demystified: Managing Multiple Projects Successfully. London: E & FN Spon.
Linn, C. S. (1981). The Implementation of Project Management: The Professional’s Handbook. Los Angeles: Addison-Wesley.
Nicholas, J. M., & Herman, S. (2008). Project Management for Business, Engineering, and Technology Principles and Practice. Amsterdam: Elseivier Butterworth-Heinemann.
Quentin, W. F., & Joel, H. K. (2010). Earned Value Project Management. London: Project Management Insitute.