Smitty’s Li’1 Haulers Case Study Presentation

Background to the Case

• Jeff Mallot is a young man seeking entrepreneurial expression;
• He has some entrepreneurial experience gained from his family because his parents had several businesses as Jeff grew up;
• He also has some engineering apprenticeship training gained by working in an automotive shop specializing in European vehicles;
• Jeff’s primary idea is to open a bar and club because it suits him;
• However, there is an opportunity to buy an ongoing business that will utilize his engineering skills;
• This presentation considers his alternatives and recommends the best course of action for Jeff.

Pros and Cons of Buying a Business

• Pros:
  • The business already has a customer base, suppliers, and cash flow.
  • The business already has systems and employees in place hence no need to start hiring.
  • The business idea is proven.
• Cons:
  • The new owner has no say in the existing structure of the business.
  • The business may not represent the actual interests of a new owner.
  • The business may fail to survive the exit of the previous owner if the customers were loyal to the person.

Pros and Cons of Starting a Business

• Pros:
  • There is time and space to design the business model in a way that suits the preference of the founder;
  • The founder has no reputational baggage to deal with;
  • The new business can determine its strategic direction devoid of historical hang-ups.
• Cons:
  • The business concept is not proven, the business idea is not tested;
  • There is a lot of work needed to get the business up and running such as recruitment, setting up of departments and marketing;
  • The prowess of the new owner is not proven in the unique circumstances of the new business.

How Jeff should Assess Smitty

• Using Business Potential:
  • Jeff needs to determine the long-term prospects of the business, relating to the customer needs it is meeting.
  • Jeff needs to identify potential competitors and determine whether there are a credible threat to the life of the business.
  • Jeff needs to look carefully at the financial performance of the business and make projections based on this.
  • Jeff needs to analyze how the business operates and to check whether he has what it will take to make the business a success.
• Using Personal Potential:
  • Jeff must check whether his skills are relevant for this job. So far he has engineering skills garnered from an automotive shop, and is in the process of acquiring entrepreneurial skills.
  • Jeff must evaluate his personal interests in relation to this business. Does he feel as passionate about carts as he does for the bar and club?
  • Jeff must also check whether he has the financial, mental and social muscle needed to take on an ongoing concern.

Exploring Further Opportunities

• Pros of looking for further opportunities:
  • Jeff will be better placed to make the decision of whether the Smitty opportunity is the one that suits him best.
  • Jeff will have a chance of understanding the business climate better since he will have to meet different business owners in London.
  • Jeff will become more informed about his choices and all the consequences of making any business choices.
• Cons of looking for further opportunities:
  • It may hurt his chances of getting Smitty if the current owner feels he is not a serious buyer.
  • Someone else may beat him in purchasing Smitty if he fails to give the current owner the commitment needed to seal the deal.
  • Jeff may end up with a business that is attractive on paper but one that will frustrate him as he runs it.
• Recommendation:
  • Jeff needs to evaluate the existing opportunity within a specified time frame, and to communicate his decision to John, the owner of Smitty.

Finance Options

1. Jeff has some savings already which he can use as a down payment for the new business.
2. Jeff should also explore getting loans from his parents because these are likely to attract little or no interest.
3. Jeff also needs to check whether he can stagger the payments, he would need to make to John over several months so that he can use the income from the business to pay off the buyout fee.
4. Jeff may also need to consider getting a loan from a bank to allow him to pay up the upfront cost if John is not willing to wait for him to raise the money.

Fair Price for Smitty

• It is very difficult to value an ongoing concern.
• The usual costs include the inventory, fixed and movable assets, and goodwill.
• Goodwill refers to the intangible value the business possesses because of its relationships with suppliers, customers and other stakeholders.
• The projected sales in the next financial period may also constitute the present value of a business.

Calculation

• Considering that Smitty average price for a wagon is about 200 dollars, and the company’ sales were already over 500 units per year in the seventies, the annual sales exceed the 100,000 dollar mark that John is asking for.
• Assuming a 20% margin, and factoring in the large single orders seen in the recent years, the sales will exceed this value by a wide margin.
• The value that John is asking for, including ownership of “Once a Tree” seems very fair.

Final Recommendations

• Jeff should consider buying Smitty after evaluating the availability of other businesses.
• He should also make a decision on how to fund the business.
• He needs to make use of the goodwill and support he enjoys from his family and friends to establish himself as an entrepreneur.