Case #2 Business Start Up Decision: Naturally Wrapped Food Stand* Jonathan Mendoza was about as excited as he had ever been! He just finished a meeting with the district manager and sales director for Naturally Wrapped Franchising. It appeared they were ready to sell Jonathan a franchise for a Naturally Wrapped Food Stand enterprise, exclusive for the County. Now Jonathan had to really evaluate the prospects for this business start to see if he really should make the commitment. Naturally Wrapped Food Stands (NWFS) were typically deployed to local events, fairs, and company gatherings to provide lunch type meals to participants. Their food consisted of healthy, all natural fresh wraps. The wrap menu included free range chicken, all hormone free natural beef, and vegetarian wraps using a series of proprietary sauces and spices, like southwest, chipotle, tangy, and Cajun flavors. The wraps were complemented with a selection of low fat natural chips, natural fresh fruit juices, as well as locally produced cookies and brownies. All meals were prepared fresh daily. The company was established in 2002 in Santa Fe, New Mexico and had a number of operations around the state. They also provided franchise opportunities throughout the West and Southwest USA. They provided a turn-key operation, providing the portable food stand, food and drink products, training, and general support for the business. For their fee, franchisees were given business training, help with state licensing, training in proper food preparation practices, and help with marketing and business development. The company solely provided the meal units to maintain their all-natural standards and product quality. They could even help with incorporating the business and providing accounting and recordkeeping systems. To start up this franchise business, the basic franchise fee for the services mentioned above was $20,000. Jonathan was told that other start-up costs would total about $10,000. This included such items as a laptop for records, accounting, and payroll. He would also have to acquire a number of inventory items (plates, cups, utensils, etc) and costs for marketing materials. There was also expense related to setting up an office at home and getting a business phone (cell phone) listed.
Food product was delivered within 24 hours to maintain freshness. Each meal unit (wrap, chips, and drink) was supplied by the company for $4.25. It was estimated that these meals would sell for $8.75. Additional revenue would be generated from the cookies and brownies (about 20% of revenue). Other costs included employee costs, fully loaded at $25 per hour--normally one employee would staff the stand. Ongoing administrative, marketing expenses, and event fees would be incurred. Finally, Jonathan was told to plan on additional food costs and spoilage at 10% of revenue. Jonathan estimated that he would be able to secure about 625 event hours the first year of operation, selling between 10 and 12 meal units per hour, on average. He was confident that he could grow the number of events each year, doubling sales within 3 years. Most events occurred on weekends and holidays, and were negatively sensitive to inclement weather. Jonathan estimated these details in a business plan model (see the Case 2 spreadsheet). He knew many of his estimates were uncertain, but felt that his numbers were realistic based on his conversations with the NWFS representatives. He knew he needed to take the project s annual net after tax cash flows and determine: payback, IRR, and NPV. He estimated that his required return for a project like this was at least 25%**. He wondered if there were ways to expand the business beyond his estimates, and, conversely, what expenses he might have missed. He also wondered about the risks associated with a business start-up like this. Now that he had gotten a green light from the company, Jonathan had to work fast. He would have to come up with the franchise fee and sign contracts within 10 days! He could see he had a ton of work to do, and that would be just the beginning if he decided to go ahead! * Entirely fictitious case. ** Jonathan s parents were willing to lend him $10,000 at a 6% annual interest rate. His uncle Charles was an angel investor and was willing to provide the remaining $20,000 start up and working capital costs for a 33% stake in the company and appointment to the board as secretary/treasurer.
Assignment: 1) After reading the case above, review the spreadsheet model carefully. 2) Below the capital budgeting cash flow model are 8 questions. Complete these questions in the shaded spaces provided. For the first 4 questions, complete the spreadsheet with appropriate cell formulae or calculated values. For the last 4 questions, use the space provided for your answers. You can use the actual spreadsheet file for convenience with your computer, or simply fill out the paper form below. Keep answers concise--use only the space indicated.
Naturally Wrapped Food Stand Input Area: User inputs in blue Initial franchise fee $20,000 Meal unit sales $8.75 Other start up expenses $7,500 Meal unit cost $4.25 Working capital & supplies $2,500 Hourly employee cost 25.00 Required return 25% Year 1 Year 2 Year 3 Year 4 Event hours 625 900 1,200 1,500 Unit meal sales 6,250 9,500 13,000 18,000 Model Area: Year 0 Year 1 Year 2 Year 3 Year 4 Initial Investments Franchise fee -20,000 Working capital investment -10,000 Annual Net After Tax Cash Flows Meal unit sales $54,688 $83,125 $113,750 $157,500 Additional food sales (@20%) $10,938 $16,625 $22,750 $31,500 Total revenue $65,625 $99,750 $136,500 $189,000 Meal direct costs 26,563 40,375 55,250 76,500 Addl food costs and spoilage (@10% revenue) 6,563 9,975 13,650 18,900 Employee costs (@$25/hr) $15,625 $22,500 $30,000 $37,500 Admin, marketing, event expense $5,500 $7,500 $9,500 $13,000 Total pre-tax expenses $54,250 $80,350 $108,400 $145,900 Pre tax operating profit $11,375 $19,400 $28,100 $43,100 Tax (@ 25%) 2,844 4,850 7,025 10,775 Operating Cash Flow (OCF) $8,531 $14,550 $21,075 $32,325 year 0 year 1 year 2 year 3 year 4 Overall Net Project CF -$30,000 $8,531 $14,550 $21,075 $32,325 Cumulative CF -$30,000 -$21,469 -$6,919 $14,156 $46,481
Questions: 1) What is the payback period of the project? 2) What is the IRR of the project? 3) What is the NPV of the project? 4) At what unit meal cost would the project's NPV = 0? Meal price causing NPV = 0: 5) What other revenue opportunities might exist with this business? 6) What expenses might not be reflected in this business plan? 7) What are some risks that might exist with this plan? 8) Based on all the information, how would you advise Jonathan regarding taking on this project? Take a stand: yes and why, or no and why not.