Richard Paul is about to graduate from his M.B.A program and planning to start running his own store. While scanning through job advertisement, he comes across of The Body Shop Canada. The notice stated that the company has number of operating stores available for franchise. Knowing the enormous success of the company, Mr. Paul decides to purchase the franchise.
Cost to start a new franchise is estimated to reach approximately $257,900 maximum. Mr. Paul estimates that he can only afford with about $125,000 which obviously still not enough to cover the start-up cost. After examine the list of franchisees, Mr. Paul realizes that 13 of them own multiple stores. Knowing this fact, Mr. Paul comes with an idea of purchasing two stores instead of one because some of the start-up costs and operating expense would not be higher than operating a single store.
Mr. Paul has two friends who are willing to involve with The Body Shop Canada franchise. Their equity holdings would provide Mr. Paul with additional capital and would lessen the work of operating two stores in separate two separate cities. In regards of the organizational structure, Mr. Paul planning to create a holding company with him as a sole owner and his two friends would be the limited partners.
The body Shop Canada has two available franchise in City A and City B. Each city has its own advantages and disadvantages. Before jumping into any decisions, Mr. Paul has been informed with a new regarding the Goodwill cost for each city. After hearing the news, Mr. Paul rushes back to his house to create a very simple pro forma statement along the lines with his projection.
This report contains the suggested alternative, design to assist Mr. Paul with his decision. One of the alternatives is for Mr. Paul to conduct an industry analysis since he has no working experience in women product industry. Financial analysis has also been provided in this report stated that Mr. Paul should consider of buying two stores instead of one based on the profit margin from the first year and the second year. The profit margin growth between the first and the second year is much higher if Mr. Paul was operating two stores.
The last part of the report is identifying the course of action that Mr. Paul should follow and how to implement them. There are four phases on how to implement the actions before and after Mr. Paul operates the store. This report will also identify the primary issue, outlining the objective, and analyzing the current situation in order to resolve Mr. Paul’s decision on whether to purchase the store or cancel his offer.
Events and Incidents Leading up to the Primary Issue|
Partnership or Not
The Body Shop has grown its company chain throughout the world. There are over 70 shops in Canada. Mr. Paul has given a thought of buying one of the franchise because he feels he has “nothing to lose” for purchasing The Body Shop franchise. Mr. Paul asks for further information regarding the criteria for purchasing one of the franchises. The franchise agreement states several agreements that need to be followed such as the company would lease the premise and sublet it to the franchisee and the franchisee must operate the business and be in the store at least 40 hours per week. Within the letter also stating the cost to start the franchise.
After estimating the cost, Mr. Paul has come up with estimation that he could afford $125,000 by himself and the rest of the payment will be covered by the bank. Based on his experience and qualification, Mr. Paul believes he would not have any trouble convincing the bank to loan him the money.
After examining the overall report, Mr. Paul comes with a thought of purchasing two franchises instead of one because he realizes there are 13 of the franchisees have multiple stores. The reason behind having multiple stores is because Mr. Paul thinks the start-up costs and operating expenses would be no higher than for a single store operation. Mr. Paul has two friends in mind that he would think would be a great partner to operate the franchise. Two of his friends will purchase a minority equity position of the franchise and it would be a great help for Mr. Paul because he would have additional capital. City A, B or Both
There are two existing locations that are available for Mr. Paul. One of the stores is located in City A and the other one is located in City B. Both cities have different advantages and disadvantages. Store that is located in City A is currently in franchise operation but the owner is planning to sell the franchise on the market due to family problems. Size of the store is inexpertly smaller than he has imagined. However, many people describe the location as the only good retail location in the city. On the other hand, the store in City B is located in one of the newest malls in an area surrounded by upscale housing and extensive development. In term of size, store in City B is much bigger compare to the store in City A.
Mr. Paul is certain that both of these stores would be well above his expectation for start-up operations. He also owns a house in City B and he is willing to stay in City B in order to operate the store. One of his potential partners is currently lived in City A and will be able to operate the store in City A. The only concern he has is determining the price of the premium for the ongoing operations.
Mr. Robertson has described the typical Body Shop Canada franchise and he believes that Mr. Paul is not the right person that would able to run the store. Without any experience of running a franchise especially a company that is specialized in women’s needs, Mr. Paul does not have any supporting evidence that may help him to be the eligible applicants.
The next issue in this case is Mr. Paul does not have a sufficient funding to run or purchase the franchise. The Body Shop Canada would not grant multiple franchises to a new franchisee. The charging cost for the two stores in City A and B are unexpectedly high with an amount of $125,000 for City A and $250,000 for City B. Knowing these charging costs have made Mt. Paul to reconsider his offer because he can only afford to pay a small amount of the charging cost. Objective|
The objective of this report is to determine whether Mr. Paul should consider purchasing the store in City A, B, both of them, or not cancel his offer to buy the store. There are several factors that should be considered before suggesting Mr. Paul with his decision on purchasing The Body Shop franchise. To ensure profitability, the financial report will be analyzed to create stronger statement for deciding the choices.
Analyze of the situation
Mr. Paul is about to graduate from his M.B.A program and planning to purchase The Body Shop franchise. His employment experiences do not prepare him to operate one of the biggest and well known companies in the world. Body Shop’s lawyer does not consider Mr. Paul as the right candidate to operate the franchise based on Mr. Paul’s educational and working background. One of the main concern is Mr. Paul does not have any knowledge on women’s product which is Body Shop’s only selling product is women’s product.
Financially, Mr. Paul needs more fund to able to afford the franchise. There are several requirements that Mr. Paul needs to pay. However, he believes
the bank would loan him the money to purchase the franchise. Instead of buying one store, Mr. Paul has a plan to buy two stores because after observing the overall report of Body Shop, he realizes that 13 of the franchisees own multiple store. Mr. Paul has someone in mind to help him operate the store and may be able to help him with the starting cost. His two friends are the ideal store owner for the Body Shop because first of all they are women which mean it would not be too difficult for them to approach the customer. Secondly, one of them is currently stayed in one of the city the store located. Mr. Paul thinks that the best organizational structure would be to create a holding company with him as a sole owner, and enter into separate partnership agreements with each of the women.
The choice of choosing which stores in which cities are not an easy decision for Mr. Paul. Each cities have its own advantage and disadvantage either location wise or financially. Mr. Paul also considering of buying both of the stores because he estimates the start-up cost and operating expenses would not be too much higher than for a single operation. The decision will be concluded based on Mr. Paul’s financial stability and other stakeholders. Situational Analysis|
Doing a proper situational analysis of the circumstances at Mr. Paul’s decision of either buy the franchise or cancel his offer would allow an insightful outlook through all angles. Performing stakeholders analysis would help assess and identify the significance of all the key groups and individuals on the success of Mr. Paul’s decision. This analysis would anticipate the kind of influence, either positive or negative. These identified groups or individuals will have on the proposed plan as well as providing with strategies to attain the most effective support possible through all.
Negative Consequences: There are several consequences for being a sole owner of the company. In case the sole proprietor fails to pay the expenses arising out of business activities, Mr. Paul’s personal properties may have to be used to pay for those. Mr. Paul also not an expert in every aspect of management especially in marketing women care product.
Positive Outcome: Having two business partners who are interested of purchasing the franchise will provide Mr. Paul with additional capital and it would be lesser work for Mr. Paul to operate the store. They can share in the profits with a minimum of efforts. Since Mr. Paul will be the general partner, he will retain the majority of control over day-to-day operations of the store, as well as making decisions for the future direction of the store.
Identification and Evaluation of the Alternatives
Mr. Paul’s decision of purchasing The Body Shop Canada franchise has never been an easy decision for anyone to make. Body Shop Canada’s lawyer Mr. Robertson has suggested that Mr. Paul could not fit with Body Shop’s philosophy, business acumen, and access to the required capital of around $250,000. After all, without the set skill and knowledge to run a franchise that is specialized in women care product, Mr. Paul may not excel to achieve Body’ Shop’s expectation. Therefore, below are some of the alternative methods that Mr. Paul could use to decide whether he should terminate his offer or keep on pursuing his goal to purchase the franchise.
Industry/External Analysis| Before entering an industry that Mr. Paul has never experienced before, it would be a smart move to analyze the industry and external factors that are affecting the company. Threats and opportunities are specific areas of analysis that Mr. Paul should be aware of because knowing the threats and opportunities of the industry, Mr. Paul would be aware what decision he has to make to improve the company’s sale and customer service.| Without any knowledge on what is happening around the industry, Mr. Paul would not be able to operate well according to the customer’s demand and in the end will not meet The Body Shop’s expectation.| PEST Analysis| Difficulties and problem that might be occurring in future will be anticipated correctly.
This is very important for Mr. Paul because suitable action can be taken before the problems occur in the future. As a result, Mr. Paul able to avoid the cost that used to recover the difficulties.| The whole analysis of PEST is constructed based on assumption without any prove. This may cause Mr. Paul to develop an unsuitable strategy based on a wrong assumption.| Partnership| With a partnership business structure, Mr. Paul does not have to make all of the decision because two of his partners have an equal responsibility to operate the store.
Since two of his partners are both women, they may have better knowledge on how to market the product and approach the customers. Kind of issues can arise with purchases for the company or even with decisions on which suppliers or clients to take on. Having all partners equal in power and responsibility can cause problems unless proper guidelines are set out. This dispute may occur in the long run.
Having only one business partner may reduce any potential dispute in the future. In terms of decision making, having only one person operates the store, it is going to be a lot faster without having to compromise and discuss with each other opinion since they will be working in one store. Having only one partner to share the profit, Mr. Paul is obviously will increase his income rather than sharing the stores’ profit with two people| Only having one partner to contribute with the purchase of the franchise, Mr. Paul will have less additional capital.
Before giving any conclusion on Mr. Paul’s decision on purchasing the franchise, Mr. Paul should consider looking at the Pro Forma Statements for a Single Franchise and the Pro Forma Statements for Two Stores. The reason for analyzing these financial statements is to determine whether Mr. Paul should purchase only one store, multiple store, or even cancel his offer. The financial ratio that will be used is the Profit Margin to indicate what percentage of each sales dollar is left after meeting all expenses and which of the two plans is more profitable.
Profit Margin: (Net Earnings/Net Sales) x 100%
Year1: Net Sales: $475,000
Net Earnings: $20,751
Profit Margin: ($20,751/$475,000) x 100% = 4.37%
Year 2: Net Sales: $617,500
Net Earnings: $54,780
Profit Margin: ($54,780/$617,500) x 100% = 8.87%
The profit margin growth from year 1 to year 2 increase by 4.5% Two Stores
Year 1: Net Sales: $950,000
Net Earnings: $36,335
Profit Margin: ($36,335/$950,000) x 100% = 3.82%
Year 2: Net Sales: $1,235,000
Net Earnings: $123,895
Profit Margin: ($123,895/$1,235,000) x 100% = 10.03%
The profit margin growth from year 1 to year 2 increase by 6.21 %
Based on the Profit Margin analysis, it is clearly shows that having two stores will be more profitable in terms of sales because the growth in single franchise is only 4.5% and the growth for having two stores is 6.21%. This has suggested that Mr. Paul should consider purchasing two stores instead of one. Decisions|
After observing the alternatives and analyzing the Pro Forma Statements, Mr. Paul should definitely follow the suggested alternatives in assisting his decision with deciding whether to purchase the franchise or cancel his offer. Just by knowing his current financial status, it has clearly stated that Mr. Paul has an insufficient fund to purchase the store. Despite his working background of seven years of retail management and has managed one of Canada’s national department store chains, Mr. Paul seems to not realize that he has no knowledge on how run a franchise that its main product is women care product. He may be confused on how to approach the customer and retain the strong relationship with his customer.
His plan on having two business partners may not also work well because he still has to operate his own store in City B by himself. Another additional point why he should cancel his offer is because he has no working experience in an industry that sells women care product and according to Body Shop’s lawyer Mr. Robertson, Mr. Paul is not the ideal person who can fit in the Body Shop Canada’s philosophy, business acumen, and access to the required capital of $250,000. This statement has to be taken into consideration because Mr. Robertson has scanned through many candidates who are offering to purchase the franchise. Therefore, he would know who would be the right person to be eligible running the franchise.
Course of Action and Implementation
If Mr. Paul still decides to pursue his goal of owning the franchise of The Body Shop Canada, there are some course of action and implementation process that should be performed before continue his application. This would not only help Mr. Paul with his decision but it will also reduce the negative impact on moral, productivity, and motivation of his partners and his employees. It will also help him to meet Body Shop’s expectation. Phase 1:Conduct Industry/External Analysis * Lack of experience in this industry, Mr. Paul should aware of any threats and opportunities of this industry * Mr. Paul should interview a Subject Matter Expert who has been working or analyzing the industry * Research from scholarly journals and online journals that have conducted a study of this industry
Phase 2:Notify the bank * According to his current financial status Mr. Paul would not be able to afford buying the store * Ask the bank to loan him the money to cover the start-up cost|
Phase 3:Notify one of his partners * Based on the suggested alternatives, Mr. Paul should have one business partner instead of one * It may be difficult to start up the store with one partner bust eventually it will bring more advantages compare to having two business partners * Outline the responsibilities * Providing Mr. Paul’s partner with the financial statements. * Notify the partner on his future plan in terms of profit sharing
Phase 4:Observe and Evaluate business activities * As soon as he operate the store * It is crucial for a business owner to keep observe and evaluate the business activities to avoid any loss and able to restructure a new plan if necessary * Document all information regarding performance of the staff for both stores