Home' Trinidad and Tobago Guardian : June 22nd 2017 Contents BG16 | FINANCIAL ROAD MAP
BUSINESS GUARDIAN guardian.co.tt JUNE 22 • 2017
Buying into a small business
It has been seven months since Syd-
ney, 38, accepted a VSEP package
from her employer, having served
as office manager for 18 years.
The payout was deposited directly
to her bank account. Today the bal-
ance is lower by $35,000, which is what she
spent on daily living expenses.
With no job prospects on the horizon, Sydney
is contemplating starting her own business.
Sydney found out that Susan, a friend of her
former co-worker Ashley, was selling her small
business that was started only a year earlier.
Susan was planning to migrate within the com-
ing months and was looking for someone to
invest in her small bread and pastry shop.
The shop, located in strip mall, serves a mar-
ket that is dominated by one competitor---a
well-established bakery with an in-house
coffee shop. To break into the market, Susan
started reselling goods purchased from three
local home-based bakers, at 15 per cent less
than the competition.
Susan said she is always careful to keep
things fresh and never carries stock over to
the following day.
She often sells off everything at half the price
in the last 15 minutes prior to closing. This
strategy has augured well for her because there
is an evident pull of customers from across
the road. Even though the business captures
the crumbs from the competition, sales have
inched up gradually in the last six months and
Susan's average monthly profit is $2,000.
Susan's asking price for the entire operation
is $250,000, which includes the cost of all the
equipment, furnishings and fixtures plus a val-
ue she ascribed for the recently established and
growing clientele. The store comes with two
employees: a sales clerk who started working
two months ago earning $4,500 per month
and a retired security officer hired after the
business suffered a failed robbery attempt. He
earns $3,500 per month.
Sydney likes the idea of not having to start a
business from scratch, however the price Susan
is asking would leave Sydney with only $30,000
which would not sustain her for very long es-
pecially at the business' current profit levels.
Sydney's other concern is the relative new-
ness of the business and the potential security
Based on these factors, she is unsure if the
investment of $250,000 is justifiable or if it
will recover her total capital outlay in a targeted
three-year time frame.
With Susan not having any other motivated
buyers, she invited Sydney to make a reasona-
ble offer for consideration and also indicated
that she is not averse to a 75 per cent down
payment of the agreed price with the balance
to be paid off in 24 months at an interest rate
of 35 per cent per annum---providing all the
legal papers are in order.
Sydney has to make a judgment call as to
which is riskier: drawing down further on re-
serves at a rate of $5,000 per month ($35,000
/ 7 months) whilst on the look out for a job
or another business opportunity or take the
plunge with this business and plunk down the
majority of her money with the hope of contin-
ued success. The latter would be determined
by her appetite for risk and an evaluation of
This case exemplifies the dynamics behind
the forces of demand and supply.
On the supply side, Susan's timeline is rel-
atively short and "not having any other mo-
tivated buyers" can be a catalyst to accepting
a lower than the asking price. However, this
urgency is counterbalanced by her need to be
compensated for all of the time, effort and
money invested thus far.
On the demand side, Sydney's situation and
timelines can also be catalysts in pushing her to
accept Susan's deal. Sydney's urgency similarly
counterbalanced by her caution to put most
of her eggs in one basket.
The question is: at which price point would
these forces come into equilibrium so that each
party feels it is a fair exchange?
As the case provides more data for Sydney's
situation, we will evaluate these to come up
with options that could provide mutual benefit.
Sydney's Objectives & Risks
A recently retrenched worker faced with
a dwindling cash reserve needs to quickly
establish a sustainable income stream from
employment, investment or a combination
of the two.
With $5,000 in monthly expenses Sydney's
capital of $280,000 (Business Sticker Price:
$250,000 + $30,000 residual cash after pur-
chase) would last 56 months, which for all
intents and purposes should be more than
enough time to find employment.
If it does take this long she would really be
starting from scratch.
Sydney must put her cash to productive use
as safely as possible but the reality is there is an
inverse relationship between risks and returns;
the more returns (as cash flows) that Sydney
requires (to cover her living needs), the greater
the risks she is expected to take.
Putting up to 90 per cent of her cash into the
bread basket can be unnerving, however, the
following are some of the points that might
help ameliorate her view of the concomitant
risks associated with this particular business:
• Bread products are staples and will always
be in demand
• Homemade products are often more at-
tractive than commercially produced ones
• The primary skill set required for this busi-
ness is basic customer service
• A smaller operation usually means more
personalised service to customers
• Prices are 15 per cent lower than the com-
petition and 50 per cent cheaper at day's end
• A track record of rising sales and profits
after only one year is a good signal
• Security personnel and a system are already
in place to mitigate this risk
Risks and rewards of
Continued on Page 17
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