Session 1 Icedelights PDF

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Susan van der Merwe 14980266

CASE STUDY: Icedelights 1. Is this a good opportunity? Factors of Comfort:  Centralized production facilities means a lower cost structure and provides Icedelights with a competitive advantage over its competitors.  The management of Icedelights Head Office is committed to maintaining quality operations with a slow and careful growth vision. They also feel strongly about the fact that store managers should be involve in the day to day operations of the business, which further illustrates that they take the business serious.  Head Office has built and developed an impressive organization by standardizing production, training, accounting and control systems, store management and store design and construction. This will provide stability, especially in during start-up.  Marketing the store as a café, it was able to derive sales throughout the day.  Although income seems to be largely at a lower level compared to Boston, the population size is about 2.5 times larger. The growth rates over the 4 year period 1988-1994 are also much higher than Boston. Thus, without a detail market analysis, there seem to be economies of scale.  Icedelights concession that $125000 could only be paid when first real estate is identified (this will help cashflow and shows Icedelights commitment), although this will mean that they have no hold on Head Office for the remainder of the franchises. Factors of Concern:  Business will be largely seasonal as frozen deserts constitute a large part of the business. This could raise some cash flow concerns.  The concern from Head Office that they might not be able to deliver as a result of capacity constraints. This will lead to the need of a production facility and the relevant expertise to be brought on board. This might be time consuming and profitability will be greatly affected, as investments will be necessary for production facilities. Further investigation into this aspect is needed to determine feasibility.  Franchise relatively expensive compared to competition, however profit potential is larger. Investment requirements of competition not known, thus difficult to draw clear conclusions with regards to risk/cost vs potential profit benefit from the information given.  Relatively new franchise chain that has not yet proven profitability on medium to long term.  Income per capita for the Florida region is much lower than for Boston. It raise the question whether the people of Florida will spend money on a luxury like ice cream to the same extend as Boston. This fact needs more research.  Unwillingness of Icedelights to become a 25% equity partner. Conclusion: The seasonality of the business, especially in the start-up phase, with regards to continued fixed cost and overheads, remains a great concern. It would make sense to complement the business by introducing a “Hot Indulgence” side that will ensure business is evenly spread throughout the year and assist with the cashflow position. Although more research is needed, this concept could be use to negotiate a “partnership” with Icedelights Head Office and possibly a smaller capital or franchise fee requirement. If this is accepted, it will add a lot of weight to their partnership with Icedelights and make future success more likely.

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Susan van der Merwe 14980266 Finally, it might be good deal that provides excellent returns on paper, but there are too many open issues that require further attention before any commitments are made or deals signed. More time is needed to investigate the market, identify further financing possibilities, investigate the implications of having to setup a production facility and evaluate the business structure in more detail. Also to do monthly cashflow predictions to ensure that cashflow during the winter months will be manageable. The additional time will also allow them to focus on and finalize their studies in June 05 before investing all time and energy into this new venture. Taking into account Icedelights policy of slow and sustainable growth, they should not have a problem postponing the deal for say 3 months which will provide them with more time to evaluate their level of ability to supply product and allow the founders adequate time to tie up the loose ends. This will also mean that the Florida stores open in the Spring/May period of 2006, which will naturally be the more profitable period of the year to sell frozen delights, enable them to repay debts easier and have a positive impact on cashflow. Following this route, will also give Mark more time to evaluate his position.

2. What are the potential Risks?       

The name of the business – it creates the perception that only cold products are sold and might hurt the business during winter time or on cold days. Financing is not in place yet and a major factor in starting a new business. Market does not take off as expected, especially as the research in this section was not thoroughly done. The fact that Icedelight’s head office might not be able to satisfactory produce and supply according to demand. It means that they will be without product to sell for a period until they can setup their own production facility, which requires investment. The timing as set out. Could lead to cashflow difficulties or capital loss. Cashflow was reviewed annually and not taking seasonality into account. This might lead to some cashflow constraints during the year and should be done monthly. The fact that they collectively have no experience in this sector at all.

3. Evaluate the deal as finally structured Whereas in the original deal they had given away 25% of the company, in the newly structured deal, they will be giving away 62.25% of the company. This means that as soon as the debentures has been repaid (estimated at 5 years), Class A board representation will be adjusted pro-rata, resulting in the investors having the majority. Thus, for the first 5 years the founders will have 50% voting power and thereafter they will only have a 37.75% voting power. Although the debenture rate comes down from 15% to 10%, which will result in a lesser interest expense, this situation is not in line with their vision to own and manage their company independently. This is not a good deal for the founders. They should first evaluate what the maximum amount is they could borrow from a financial institution. If this is not enough, they should rather issue more debentures in stead of equity, even if it is at 15% interest. This will remain a good investment for investors as the founders’ investment into the venture represents 10%. Currently only 3% of that is in Equity. It might create more investors confidence if they increase their investment in class B equity shares instead of debentures as this means they are last in the queue to claim their capital back. They can then approach previously keen investors with the revised offer.

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