Tuesday, March 12, 2019

Be Our Guest

Be Our thickening, Inc. Case Analysis paginate 1 INDEX 1. Key success factors & every last(predicate)iance performance.. 3 2. pious platitude posture regarding the performance.. 7 3. Bank financing aspect at the terminus of 1998. 10 4. Management perspective regarding the wedge financing. 13 5. render 1 annual Income estatements (1994-1997)17 6. Exhibit 2 annual Balance Sheets (1994-1997).. 18 7. Exhibit 3 every quarter Income Statements 1997. 19 8. Exhibit 4 Quarterly Balance Sheets 199720 9.Exhibit 5 anticipate21 10. Exhibit 6 Annual proportionalitys. 22 11. Exhibit 7 Quarterly Ratios.. 23 Tudor team up five-spot varlet 2 1. What argon the pick up success factors in this equipment rental trade? How has the keep political m whatever performed the past few languish time? Key Success Factors louver of the key success factors ar as follows First, the location of the barter is i compete for handling several projects at once. This is collect to their ce ntral Boston location. The ability to insure everal projects at once gives the ships bon ton a competitive edge and all toldows them to prepare a performance as close to the full potential of the confede proportionalityn as possible. Second, the play alongs leaders have been successful in crystallizeworks to primary and secondary lymph glands. This has aided in growing a c commensurate that is ground on a foundation of cracking community/client relationships. These safe relationships have led to signifi toilett repeat customers as a toughened basis of the companys receipts. Fostering these relationships throughout the age of the companys existence has in like manner led to sustained revenue maturement grade after grade.This revenue completeshoot is shown in the fiscals and, utilize the Compound Annual Growth Rate, it tramp be seen that this growth in revenue has been 14. 26% from 1994 to 1997. Third, the executive director solicitude is well experienced i n the hospitality industry as well as other industries that connect to the successful ope symmetryn of a backup. Stephen Lizio was involved in the food and vino business prior to founding Be Our guest in 1983. Al Lovata was previously a banker and began his relationship with Be Our Guest as a financial consultant, later joining the organization full-time as the chief(prenominal) Executive Officer.Lizio and Lovata together form a foundation of strong acquaintance of the hospitality Tudor team up louver knave 3 business and the vital knowledge of finance, thus giving the business a force of under stand both its industry and how to manage the money coming into the company. Simone Williamson was brought on to the group and comes from historic period of experience in the food return business. She also came to the company with strong ne iirking connections in the catering industry in Boston, which pass on reinforces the second success factor described above. This management team is do up of members that complement ach others strengths, as well as provide the necessary skill sets for running a successful business. The shite key success factor is that the company set its business protrude early(a) on and held its course throughout the age without deviation to business amplifications that would have resulted in higher cyberspaces nevertheless fewer turnoers. This can be seen in the companys abstract of the potential of The executive team de confinesined that this entering the tent rental market. market, though passing profitable, would result in time delays and longer turnovers and would split their core business.The team recognised that this split could result in lower profitability and crisp of the core business structure. Rather than expand into a low profit margin business tents, in which the management lacks market expertise, they chose to stick to their initial business plan and cogitate on their key strengths rather than set off from the companys set fundamentals. This example illust regularizes that the company followed its original business plan and complied with its billing and vision from the beginning without deviation. In doing so, the company built a strong foundation and upheld the strength of that foundation.The fifth key success factor identified here(predicate) is the high character reference of service as well as the high quality of the rental equipment provided to clients. The executive team recognised early that they could compete in either price or Tudor team Five Page 4 quality, and the team chose to compete in quality. give of this high quality service is seen in the companys committedness to its clients through its get outingness to deliver only one table on oblivious notice if a client is in lease. Through high quality service, the company has upheld its networking connections to clients by building strong relationships.This high quality service combined with high quality rental equip ment products has allowed the company to obtain a competitive edge over its competition, keep that competitive advantage, and foster strong company/client relationships throughout the years. How has the company performed the past few years? Viewpoint Independent perspective Be Our Guest, Inc. originated in 1983 and is still comfortable in a very(prenominal) competitive and volatile industry 14 years later. Over the past few years the company has shown large growth.We see that Annual sales revenues have consistently risen from 1994 to 1997 with a Compounded Annual Growth Rate (CAGR) of 14. 26%. 1997 was an impressive year for the company with a 22. 7% emergence in revenues. Gross Margins were very consistent year over year for 1994 through 1997. Gross margins for 1994, 1995, 1996 and 1997 were 53. 9%, 49%, 52. 63% and 55. 5%, respectively. Be Our Guest, Inc. is doing a solid gambol of keeping the Costs of Revenue in gillyflower with the Sales Revenue. It is a arrogant sign t o see this growth, because we can be assured that the company is staying competitive, while not completely giving in to the pricing crunch.Annual Sales Revenue has a strong CAGR, only if it is important and dreading to business that the CAGR of total operate Expenses is higher. It is about 5% higher and this is very important, because Be Our Guest needs to stay in control of its expenses. Tudor police squad Five Page 5 The high and increase Operating expenses are cutting into the Operating margins, which also cuts into the bottom duct. Be Our Guests balance sheet shows good signs of liquidness. Current Ratios for the past four years have remained above 1 proving that the company can handle its menses liabilities. The actual ratios are not extremely high (19941. 7, 1995- 2. 17, 1996- 1. 15 and 1997- 1. 16), just they can cover the on- leaving liabilities. It is important to note that the company is in operation(p) on a thin reap because the accredited assets are except covering the current liabilities. This is finickyly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in 1995. The current ratio in 1995 is an outlier, because 2. 17 do not accurately represent the company.The quick ratio is the said(prenominal) as the current ratio for Be Our Guest because they do not have inventory for all of the rental equipment is under property and equipment. They display a good working capital office staff as well, which is another measure of liquidity. Cash amaze is a concern for we can see in 1994 and 1997 that they actually had an Overdraft, and for 1995 and 1996 cash is not very high. However, this company is in an industry that is more of a receivables business, so the cash position is not a high concern, in particular given that it is covering the current liabiliti es.Since this is a receivables business it is important to reflexion at the Receivables overthrow ratio, and we find that this is quite consistent, however when comparing to the Payables Turnover ratio we see that they are paying out more cursorily than they are receiving, which is a problem. In 1995 they are paying out double on average before collecting. Be Our Guest needs to focus on getting its receivables in a more timely manner. Tudor Team Five Page 6 2. As the bank add officer, Anne Granger, how would you put on this company? What concerns might you have about the business and the lend elationship? What factors provide a reservoir of comfort when considering the reference point risk? Anne testament look at Be Our Guest, Inc. with both an annual and describely perspective really focusing in on the companys liquidity, supplement and how they provide match up to the powder compact ratios established. The company is liquid, but it is not extremely liquid. Be Our Guest, Inc. is save covering the current liabilities, and from a banks perspective we would want to see that in that respect are not any concerns in this area. If the company is to become insolvent, we want to be able to get our outstanding balance back.We know that Q1 is the worst quarter for the company, and you can see that for Q1 1997 the company displays a current ratio of . 88, which is simply not good, and means that during that quarter they did not have the ability to pay all current liabilities, and then having to access the line of computer address during this quarter. Q1 is also the hardest month for this company to extend its receivables, which can or sotimes be the cause for liquidity problems. The top line growth is great to see, curiously in the competitive space that the company operates in, but we also need to examine the rest of the income line.It is concerning to see the Operating Profit Margin as well as the rice beer reporting Ratio declining year over yea r. Operating Profit Margin shrinking is a negative because it indicates that the company is not controlling its operating expenses. Interest Coverage Ratio is especially concerning because this ratio indicates the ease of paying the pastime on the outstanding debt, and Be Our Guest, Inc. may struggle paying the by-line down the road if the ratio continues to decline. Note that the company is currently to the full adequate of paying for the interest on an annual and quarterly Tudor Team FivePage 7 basis, but the trend downward impart be noticed. Be Our Guest, Inc. relies on debt to build the business as you can see from the long term debt to equity ratios. However, the ratios are somewhat consistent and it drops down to . 43 in 1997. The company is more than capable to cover the interest of this debt as noted earlier. Cash Flow is cosmos adversely affected due to the abnormally large growing (56%) in G during 1997. According to the footnote on page 4 of the case, a compan y the size of it of Be Our Guest should have G sales in 1997 closer to $565,718 rather than the $840,718 that was reported.The bank pull up stakes keep a particular eye on Cash Flow/Debt Service Ratio and Debt/Tangible network Worth Ratio along with the bottom line, since the pledges complicate requirements regarding these. The covenants require the Cash Flow/Debt Service ratio to not be less than 1/251, and the company is in line with this covenant on an annual basis. However, the company does not satisfy this covenant when spirit at the quarterly figures. Debt/Tangible Net Worth cannot be greater than 2. 001, and Be Our Guest, Inc. satisfies this covenant on an annual and quarterly basis.According to the covenants, the company cant incur two consecutive quarter of net losses nor incur a net loss for any financial year. The company did incur a loss in Q1 1997, but followed with a strong Q2 net profit, so the company is in compliance with this covenant as well. Be Our Guest , Inc. is in a seasonal industry, which is a concern, but even more of a concern is the companys unfitness to produce projections. We understand that projections may not be extremely accurate, but it is possible to project through the use of confidence intervals.The bank becomes a little more comfortable with the seasonality because they feel that Al Lovata (former Banker) is aware of the risks associated and has a handle on them. Tudor Team Five Page 8 The balance sheet is decent, but it is not incredibly strong because it is barely covering the current liabilities. As a banker we would also be pertain about the customer applyup. Be Our Guest, Inc. relies heavily on two particular customers (Customer A and B), which specify up over 21% of the companys sales.These two customers make up 1/5 of the companys budget, and I would like to know if the company has any backup plans in case they lost either of these customers and has performed the due diligence required to make sure its ma jor customers are not insolvency risks themselves. Other than these top two customers, it appears that the customer base is spread out appropriately. The strong covenants in mystify are a source of comfort for the bank. Not only do they have strong covenants, but the bank also has virtually all of the companys assets pledged and the shareholders guarantee the impart.Given that this is an S Corporation, the shareholders in the flesh(predicate)ised assets would be safe, but since these shareholders guaranteed the impart, the bank can go after the personalised assets of the shareholders. Be Our Guest, Inc. is not a start-up company, and it has been in operation since 1983, so there is a level of comfort knowing that this company has been around for over 10 years and has been remotely successful during this time as well. It has great management in place who each contributes strong and complimentary experiences along with a level of expertise.This company is focused and driven to p rovide the outmatch service they can within the industry, and they have been rewarded for it with the 1997 Small Business star sign of the Year. While Be Our Guest may not be the sterling(prenominal) risk, there are provisions in place and aspects of the company that make Be Our Guest an acceptable risk for the bank. Tudor Team Five Page 9 3. How much total bank financing will the company need at the end of 1998, including both the short-term acceptation under the bank character reference line and the outstanding amount of the term loan? For convenience, assume that 1998 sales are $3,000,000. ) In order to forecast how much total bank financing the company will need at the end of 1998, there are two possible shipway of forecasting the financial results in terms of balance sheet and income instruction. The analysis must wee into account the highly unpredictable, seasonal nature of the business. ascribable to this seasonality, there is high level of uncertainty whichever for ecasting method is applied. The freshman method is to estimate the future income statement based on a trend or horizontal analysis.In this specific case, a sharpen annual growth rate (CAGR) for each item on the income statement was cypher for the years 1994-1997. With regards to revenue, $3,000,000 for 1998 was accounted for in the calculation. This analysis shows an increase in G due to the unusual increase in G the previous year (1996-1997) affecting the CAGR in 1998. Consequently, the income statement shows a loss in the Net earnings when applying this method. The second method is to calculate the be of revenue based on the percentage impact of each item of cost on the total revenue in 1997 (vertical analysis).This analysis, according to us, seems more logical in itself and also leads to a much more positive outlook for 1998 (Net Earnings of $99,408). The result would be sustainable for the business. Two more whole tones are necessary to forecast the financing needs for the year 1998 Tudor Team Five Page 10 The first measure is repayment of the line of credit for the short-term liabilities ($140,000+$3,498). The second step is better management of the seasonality, especially for quarters 1 and 4 which are the most risky quarters for the business.Given that Net Earnings are around $68,096, the line of credit needs to cover the difference ($75,402). Taking into consideration the seasonality, calculated as operating cash flow (refer to case covenants), there should be no liquidity problems year-end 1998. The cash flow available at the end of 1998 completely covers the losses in Q1 and Q4. The company should keep the line of credit, because debt is incurred upon the credit line only when used. The management, however, should only use the credit line when suddenly necessary.Finally, the company should convert approximately $75,000 of the $140,000 of the line of credit into long-term debt because it will cost less in terms of interest. In addition, the co mpany should increase the long-term debt accordingly (based on the dodge regarding future investments see termination to question 4). Assuming that the long-term loan is amortised in a invariant manner, with approximately 25% payoff per year as current share of term note, shown to be the same figure as 1997 ($75,268) which is calculated based on the term note payable less current instalment of $168,043 for 1998.Tudor Team Five Page 11 Proposed here is a two-step approach for financing the investment The first step is to obtain another long-term loan of $200,000 to change and improve the audio and IT systems. This will lead to a better position to judge the current market needs to revise and produce a strong strategy for the business in terms of efficiency, profitability and long-term outlook. Once this step is accomplished, by 1999, the company should obtain yet another long-term loan.Regarding the opening night of an acquisition, if Be Our Guest makes an acquisition, it can do so through a leveraged-buyout. Therefore, taking on the debt of the company being acquired and funding the other part of the acquisition by selling part of the equity of Be Our Guest (Following the financial restructuring and the increase in efficiency the value of the stock will increase). Asking for a loan for an acquisition today would not be reasonable, nor is it likely that the bank would agree to burden the loan. Currently, the financial ratios of the company do not justify an acquisition.Therefore, starting off with a smaller loan to improve the company running in terms of efficiency and fundament will be of greater value. In total the company should take the following long-term loans $75,000 (line of credit born-again into long-term loan) $200,000 (investment) $168,000 (outstanding long-term loan) good long-term loans in the Balance Sheet by end of 1998 $443,000 As already mentioned before, the line of credit should remain available at the same level as before ($140,000) since it is only paid for if used (expected 1998 to the full available).Tudor Team Five Page 12 4. What should Al Lovata and Simone Williamson implore for when talking with the bank? If the company needs additional bank financing, should the increase be provided by an increase in the credit line, or should the size of the term loan be increased to meet the need? Should they assume for some relaxation or change in the loan covenants, curiously the personal guarantees that they have provided at the banks request? Al Lovata and Simone Wiliamson should approach Anne Granger in a confident way.Be Our Guests balance sheet is fairly strong and fairly liquid, the income statement shows signs of growth and the company is generally doing well. Hence Be Our Guest can take a confident stand to discuss the covenants openly with the bank in order to reach some relaxation on the rigid terms. They need to work with the bank to *lower the rate *review the requirements of personal guarantees fo r the loan Be our Guest Inc. can consider the possibility of going to another bank if State Street holds their ground on these severe covenantsConsidering the current and past status of the balance sheets and income statements it is realistic to assume that Be Our Guest, Inc. would not have much difficulty to find a bleak lender who would agree on different, more relaxed terms of covenants. The company primarily needs the line of credit to finance the seasonal effects of Q1, which could be reduced by a solid growth or elaborateness plan or merely revising the companys HR strategy regarding the full-time staff during Q1. Tudor Team FivePage 13 For example, they could reduce the staffs hours, which would keep them on a full-time employment base but would reduce the G be for this particular quarter or they could put the full-time staff on a strategic rotation plan which incorporates the poor business of quarter 1 but leaves options in case of unexpected business in this time period which would also reduce the general G costs and still leave the company in a good position to handle short-term notice business.Regarding the interest for outstanding borrowings on the credit line as well as the interest for the long-term loan, it has been dependably covered and there is no immediate reason to believe that this will change. Any future increase of the long-term loan to drive the growth of the company in terms of business expansion or increasing assets can only be interpreted in a positive way seeing that the revenues have shown to increase with all previous growth-measures.State Street bank should recognise the companys solid management foundations and the well-going business over the past years and keep their good standing with Be Our Guest, Inc. Lovata and Williamson want to be prepared for future growth. The way to growth has been identified in two possible options, completing an acquisition or expanding their product line. Both of these strategies need to be sup ported by a consistent long term plan in order to finance their investment needs.Pertaining to this reason, for funding their growth they should ask the bank to extend their long term lend (clearly cheaper than a revolving credit) and moreover ask to re-negotiate the interest rate (too high especially to be a prime rate). additionally each growth plan in the first few years needs patience and flexibility in terms of managing losses, therefore it would be of the essence(p) to review Tudor Team Five Page 14 at least part of the current covenants, like prohibiting two consecutive quarters of net losses and avoiding a net loss for any fiscal year.Taking into account that they are in a good financial position and that the extra money they would need is for future expansions and growth of the company, refinancing its existing debt to obtain better terms, could be quite reasonable. Moreover the company has a fairly strong balance sheet and profitable growth, so it has plenty of bargainin g power to negotiate a better deal with the bank. The only negative item is given by the decrease in the last 4 years of the net income, but again it is an issue suggested by a covenant (distribute more than 50% of the earnings to the principals).It is belike the most useless and most dangerous of the list as it is leading(a) the owners to distribute the profit thereby increasing the G costs. Definitely, another crucial aspect is about liquidity pang, especially for an already seasoned business as that of Be Our Guest. In this case they should consider converting some of their revolving credit to term debt (cheaper) making line of credit available, which is currently fully used (coherently to the 1998 expected cash position, answer 3).In this sense the beat out deal for Be Our Guest might be to invest in a business that generates revenue during current slow seasons and eases the firms reliance on credit for working capital. Thus even if the tents business could be plainly exter nal to the Be Our Guest business model this business expansion should be taken into consideration. It is not only a new source of profit but will also enable profits for the current business in the slow seasons (tents are mainly set off in the rainy and cold seasons like fall and winter).However, they should be able to distinguish between long term debt and short term line of credit, using the first one for investments and the second one to manage liquidity pain periods. Tudor Team Five Page 15 departure aside its convenience in general, the nature of the long-term debt, makes the development of the financial plan easier by providing the exact future payment scheme. On the adverse the line of credit is extremely useful to manage liquidity pain periods but should be paid back quickly or converted in term loan.Finally while refinanced bank loans for now may be adequate to finance the company, it may not be comme il faut for future plans and therefore curb the expansion (current deb t/tangible worth ratio is already higher than 1). They should consider a different way of natural elevation funds e. g. from selling equity. Reviewing the personal guarantees is fundamental in order to trace new investor and to manage the company differently. Be Our Guest was created as a business idea and for many years ran more like a family business but now it is a profitable firm that should be managed in terms of efficiency and profitability.This leads to two necessary actions one by the State Bank, to get rid of the covenant including the personal guarantee of the loan by the management and second by Be Our Guest, Inc. to review their company status. In terms of the State Bank, it will be essential to incite Anne Granger to remove the covenant regarding the guarantee for the long-term loan. From the point of view of the management of Be our Guest, Inc. they need to review their company status. Only when they successfully separate the business from the family-business approa ch on which terms Be Our Guest, Inc. as founded, they can attract future investors. Tudor Team Five Page 16 Exhibit 1 Annual Income Statements (1994-1997) Tudor Team Five Page 17 Exhibit 2 Annual Balance Sheets (1994-1997) Tudor Team Five Page 18 Exhibit 3 Quarterly Income Statements 1997 Tudor Team Five Page 19 Exhibit 4 Quarterly Balance Sheets 1997 Tudor Team Five Page 20 Exhibit 5 Forecasting Tudor Team Five Page 21 Exhibit 6 Annual Ratios Tudor Team Five Page 22 Exhibit 7 Quarterly Ratios Tudor Team Five Page 23

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