Case Study:
Case Study I: Which Will it Be?
Georgia Isaacson and her son Rubin have been thinking about buying a business. After talking to seven entrepreneurs, all of whom have expressed an interest in selling their operations, the Isaacsons have decided to make an offer for a retail clothing store. The store is very well located, and its earnings over the past five years have been excellent. The current owner has told the Isaacsons that he will sell for $500,000. The owner arrived at this value by projecting the earnings of the operation for the next seven years and then using a discount factor of 15 percent.
The Isaacsons are not sure the retail store is worth $500,000, but they do understand the method the owner used for arriving at this figure. Georgia feels that since the owner has been in business for only seven years, it is unrealistic to discount seven years of future earnings. A five-year estimate would be more realistic, in her opinion. Rubin feels that the discount factor is too low. He believes that 20 to 22 percent would be more realistic.
In addition to these concerns, the Isaacsons feel they would like to make an evaluation of the business using other methods. In particular, they would like to see what the value of the company would be when the adjusted tangible book value method is employed. They also would like to look at the replacement value and liquidation value methods.
"We know what the owner feels his business is worth," Georgia noted to her son. "However, we have to decide for ourselves what we think the operation is worth. From here on we can negotiate a final price. For the moment, I think we have to look at this valuation process from a number of different angles."
1. If the owner reduces the earnings estimates from seven to five years, what effect will this have on the final valuation? If the individual increases the discount factor from 15 percent to 20 to 22 percent, what effect will this have on the final valuation? Explain your mathematical answer, then, in two paragraphs, describe and define the concept of final valuation and its meaning in businesses and entrepreneurial activity.
2. How do the replacement value and liquidation value methods work? Why would the Isaacsons want to examine these methods? Be sure to define and describe both. Then, compare and contrast the two with at least two examples of each. Be sure to cite your sources.
3. If the Isaacsons conclude that the business is worth $410,000, what will be the final selling price, assuming a sale is made? Defend your answer. Are there ways to increase the value? What are they?
Case Study II: Needing Some Help On This One
In the past, most people who wanted to get their foreign sports cards fixed had to turn to the dealer from which they had purchased the car. In recent years, however, auto repair shops that specialize in foreign sports cars have become popular in some areas of the country. When Jack Schultz started his company ten years ago, he was lucky if he had two cars a day to work on. Today, Jack has 15 people working for him, and he usually has a backlog of about five days' work. Some of this work is repairs caused by auto accidents; a lot of it is a result of improper maintenance by the owners.
Jack is 64 years old and feels he will work for about six more years before retiring. The business is very profitable, and Jack and his wife do not need to worry about retirement income-they have saved more than enough. However, Jack is concerned about what to do with the business. He has two children who work with him, Bob (31 years old) and Tim (29 years old). Jack has not asked either of them if they would want to take over the operation. He assumes they will. He also has a nephew, Richard (35 years old), working for him. All three of these relatives have been with Jack for nine years.
Jack believes that any one of the three could successfully head the venture. But he is concerned about in-fighting should he favor one over the others. On the other hand, if he turns the business over to all three of them collectively, will they be able to get along with one another? Jack has no reason to believe that the three cannot work things out amicably, but he is unsure.
Jack has decided that he cannot wait much longer to groom an heir. The major stumbling block is identifying who that person will be. Additionally, Jack really does not know anything about picking a successor. What characteristics should the individual possess? What types of training should the person be given? What other steps should be followed? Jack feels that he needs to answer these questions as soon as possible. "I know how to plan business operations," he told his wife last week, "but I do not know how to go about planning for the succession of business operations. It is a whole different idea. I need some help on this one."
1. Identify and briefly describe four characteristics you would expect to find in a successful manager of this type of venture. Does the manager identified have these traits? Explain your answer in a thorough two page essay. Compare and contrast these traits to those in other businesses.
2. What steps does Jack need to follow to successfully identify and groom a successor? Be complete in your answer. How does a successor differ from a staffing contingency plan? Be sure to compare and contrast the two.
3. If you were going to advise Jack, what would you recommend he do first? How should he get started with his succession plan? What should he do next? Offer him some general guidance on how to handle this problem.