Beautiful Legs by Post
Class vote
•
How many of you would invest in this
venture?
•
Would invest
•
Wouldn’t invest
Career choices
Measure
Salary now
Salary 5 years
Long-term rewards
Work hours
Experience
New venture
Small
Depends on success
Capital gain
7 days a week
?
Job
$60-70k
$100-150k
Stock options
5 days a week
?
Stakeholders and Goals
•
•
•
•
•
•
•
Who are the stakeholders in this case and
what are their goals?
Elizabeth
Dickon
Supplier of tights
Department stores
Other upscale stores
Consumers
Opportunity
•
What is the opportunity?
•
Why did Elizabeth choose tights as the first
product?
•
Who in this class wore tights regularly as
part of a dress code (official or unofficial)?
Opportunity
Describe the opportunity that exists for BLBP in
terms of the 3 M’s
•
#1 Market demand
•
•
•
•
#2 Market size and structure
•
•
•
Market share & growth potential = 20%+, 20% annual growth, and durable?
Is the customer reachable?
Customer payback < 1 year
Emerging and/or fragmented
Proprietary barriers to entry
#3 Margin analysis helps differentiate an opportunity from an
idea
•
•
•
•
Low cost provider? (40% gross margin)
Low capital requirement versus the comp.?
Break-even in 1-2 years?
Value added increase of overall P/E?
Entrepreneurs
•
•
•
Is Elizabeth the right entrepreneur to pursue
this opportunity?
Is Dickon the right entrepreneur to pursue
this opportunity?
Are Elizabeth and Dickon as a team the
right entrepreneurs to pursue this
opportunity?
Resources
•
How much money does the team need in the
next 30 days?
•
•
•
110,000 Pounds
Is this the right amount?
How urgent is their need for capital?
Resources
•
Would a venture capitalist be interested in
this project?
–
–
–
–
Strong skills, none in mail order = not an A
team
Venture will not get big enough to interest VC
Industry segment not one that attracts seedstage VC
Unlikely to acquire money in 30 days
Resources
•
Will a bank loan any money to this venture?
–
–
Company has no assets to secure debt
Bank will require personal guarantees from
Elizabeth and Dickon, and even then probably
would not be eager to make this loan
Resources
•
Would a strategic partner invest in Beautiful Legs
by Post?
–
–
–
Beautiful Legs by Post has no track record
In this type of industry, strategic partners invest in
companies with proven track records. In the rare event
that they do provide seed-stage capital, it is to a founder
with a track record of success in the industry
It will take several months to attract such interest even
if it were possible
Evaluating business plans
•
Important skills because it makes you more
critical of your own business plans
•
What would you look at?
•
Would you view the business plan in any
specific order?
Evaluating business plans
•
Order in which external reviewers read a
business plan:
–
–
–
–
–
Resumes/CVs
Executive Summary
Opportunity
Entrepreneurs
Resources
Evaluating business plans
•
Do my financials matter?
–
You must have financials - demonstrates your
perspective of the business model
–
However, investors will most likely want the financials
reworked to address their concerns
–
Investors tell the entrepreneurs how much money is
required
Evaluating business plans
•
•
•
•
Let’s take a look at the Beautiful Legs by
Post business plan
Is this a good plan?
What aspects of this plan are particularly
strong?
What if anything is missing?
Evaluating business plans
•
•
•
What is the entry strategy for Beautiful
Legs by Post?
Does this strategy make sense?
Compare this strategy to the entry strategy
for Fax International.
Financial Highlights
•
•
•
•
40% Gross Margins
Ł195,811EBIT YR 3
Exit @7x Earnings
ROI for Investors of 60% (Ł80,000 for 20%
equity + Ł30,000 note)
What are the Critical
Assumptions?
•
•
•
•
Response rate (1.5%)
Average order (4 pairs/Ł30)
Customer retention rate
Friend of a friend rate
Sensitivity Analysis
Hit Rate
Customer Order Size
Retention Rate
Friend of Friend Rate
P/E
1.50%
4
95%
1.50%
7x
Sensitivity Analysis: Basis
P&L
Revenue
Postage Charges
Net Revenue
Cost of Tights
Packaging
Catalogue
Ack Insert
Inducement repeat
Inducement new
Postage UK
Postage Europe
Packers and Warehouse
Operating Costs
Marketing Costs
Free Tight Costs
Marketing an Promo
Admin
EBIT
8/31/1996
342213
21273
363486
8/31/1997
1063111
67121
1130232
8/31/1998
1582760
101341
1684101
209073
2807
3579
960
5808
2152
6347
846
18772
250344
646130
8370
10675
2862
7586
7991
16826
5048
55983
761471
961411
12389
15800
4235
11489
9738
21792
11207
82862
1130923
96202
3179
99381
173332
1382
174714
190684
1382
192066
66149
-52388
154106
39941
165301
195811
Hit Rate -25%
P&L
Revenue
Postage Charges
Net Revenue
8/31/96
8/31/97
8/31/97
256659.8 797333.3 1187070
15954.75 50340.75 76005.75
272614.5
847674 1263076
Cost of Tights
153995.9
478400
Packaging
2105.25
6277.5
Catalogue
2684.25
8006.25
Ack Insert
720
2146.5
Inducement repeat
4356
5689.5
Inducement new
1614
5993.25
Postage UK
4760.25
12619.5
Postage Europe
634.5
3786
Packers and Warehouse
14079 41987.25
Operating Costs
184949.1 564905.7
Marketing Costs
Free Tight Costs
Marketing an Promo
Admin
EBIT
96202
3179
99381
66149
-77864.6
173332
1382
174714
Critical Assumptions:
Hit Rate
Order Size
712242 Retention Rate
9291.75
11850 Friend of Friend Rate
3176.25
8616.75
7303.5
16344
8405.25
62146.5
839376
190684
1382
192066
154106
165301
-46051.7 66332.75
Influence Factor
1.13%
4
95%
1.50%
75%
100%
100%
100%
Hit Rate +25%
P&L
Revenue
Postage Charges
Net Revenue
8/31/96 8/31/97 8/31/97
427766.3 1328889 1978450
26591.25 83901.25 126676.3
454357.5 1412790 2105126
Cost of Tights
Packaging
Catalogue
Ack Insert
Inducement repeat
Inducement new
Postage UK
Postage Europe
Packers and Warehouse
Operating Costs
261341.3
3508.75
4473.75
1200
7260
2690
7933.75
1057.5
23465
312930
Marketing Costs
Free Tight Costs
Marketing an Promo
Admin
EBIT
96202
3179
99381
Critical Assumptions: Hit Rate Influence Factor
Hit Rate
1.88%
125%
Order Size
4
100%
1201764
Retention Rate
95%
100%
15486.25
19750 Friend of Friend Rate
1.50%
100%
807662.5
10462.5
13343.75
3577.5 5293.75
9482.5 14361.25
9988.75 12172.5
21032.5
27240
6310 14008.75
69978.75 103577.5
951838.8 1413654
173332
1382
174714
190684
1382
192066
66149
154106
165301
-24102.5 132131.3 334105.5
Order Size -25%
P&L
Revenue
Postage Charges
Net Revenue
8/31/96 8/31/97 8/31/97
256659.75 797333.3 1187070
15954.75 50340.75 76005.75
272614.5 847674 1263076
Cost of Tights
Packaging
Catalogue
Ack Insert
Inducement repeat
Inducement new
Postage UK
Postage Europe
Packers and Warehouse
Operating Costs
156804.75 484597.5
2105.25
6277.5
3579
10675
960
2862
4235
5808
7586
11489
2152
7991
9738
4760.25 12619.5
16344
634.5
3786 8405.25
18772
55983
82862
195575.75 592377.5 879223.3
Marketing Costs
Free Tight Costs
Marketing an Promo
Admin
EBIT
Critical Assumptions: Order Size Influence Factor
Hit Rate
1.50%
100%
Customer Order Size
3
75%
721058.3
Retention Rate
95%
100%
9291.75
15800 Friend of Friend rate
1.50%
100%
96202
3179
99381
173332
1382
174714
190684
1382
192066
66149 154106
-88491.25 -73523.5
165301
26485.5
Order Size +25%
P&L
Revenue
Postage Charges
Net Revenue
8/31/96
8/31/97
8/31/97
427766.25 1328889 1978450
26591.25 83901.25 126676.3
454357.5 1412790 2105126
Cost of Tights
Packaging
Catalogue
Ack Insert
Inducement repeat
Inducement new
Postage UK
Postage Europe
Packers and Warehouse
Operating Costs
261341.25 807662.5
3508.75 10462.5
3579
10675
15800
960
2862
4235
5808
7586
11489
2152
7991
9738
7933.75 21032.5
27240
1057.5
6310 14008.75
18772
55983
82862
305112.25 930564.5 1382623
Marketing Costs
Free Tight Costs
Marketing an Promo
Admin
EBIT
Critical Assumptions: Order Size Influence Factor
Hit Rate
1.50%
100%
Customer Order Size
5
125%
95%
100%
1201764 Retention Rate
15486.25 Friend of Friend rate
1.50%
100%
96202
3179
99381
173332
1382
174714
190684
1382
192066
66149
154106
165301
-16284.75 153405.5 365136.5
Sensitivity Analysis Results
EBIT
Basis
Order Size +25%
Order Size -25%
Hit Rate +25%
Hit Rate -25%
1996
-55,388
-16,284
-88,491
-24,102
-77,864
1997
1998 Exit@7x
39,941 195,811 £1,370,677.00
153,405 365,136 £2,555,952.00
-73,523 26485 £185,395.00
132,131 334,105 £2,338,735.00
-46,051 66,332 £464,324.00
Implications of Sensitivity
Analysis
•
•
•
Results are extremely sensitive to response
rate, order size, and retention rate
25% drop in any factor creates disastrous
results
What does this mean for Elizabeth and
Dickon?
1.
Beautiful Legs by Post
2.2 Directors' Compensation and Share of Ownership
During the three moth test phase both directors are forgoing all compensation. On
completion of the first round of financing the directors will each be paid a basic salary of
£25,000 per annum with no benefits-in-kind. This is significantly lower than the market
level which INSEAD graduates command.
Until the first round of financing, each director will own 50% of Beautiful Legs by post,
having each made an equity investment of £5,000.
As a potential investor is there anything which might be a red flag in this passage?
__________________________________________________________________
__________________________________________________________________
2. Beautiful Legs by Post
1.6 Competitive Advantage
We will have the advantage of being the first mover. We will be the first to locate the
buyers of high quality tights and will be able to keep them by offering an efficient
and reliable service through a Monthly Order Program. For a new entrant, since many
potential customers will be our customers, their "hit-rates" will be reduced. This
means that the cost of acquiring clients becomes prohibitive. New entrants cannot
gain market share through price reductions since quality is perceived to be reflected
in price.
Identify three things should concern an investor in this passage (there are more than three)?
“1.9 Exit Strategy
We seek to have a saleable business by the end of the third year. The potential purchaser
is likely to be a trade buyer, either from the hosiery or mail-order business. Hosiery
companies are currently fighting for market share and this would give them another
distribution channel closer to the customer. A mail-order house would be interested in
our client base since it will contain names of active purchasers of a quality item. These
names could be used to launch new products.”
What would concern you about this statement as a potential investor?
“1.10 Proposed Offering
The offering will comprise of Ordinary Salaries (1 pound par value) and short-term
debenture stock. Under the business plan's assumptions, there will be one round of
financing. We are asking outside investors to purchase 20% of the company for 80,000
pounds, and to loan 30,000 pounds in the form of debenture stock that will be repayable
in six months.”
What, if anything, seems wrong with this offer from the perspective of potential investors?
Keep in mind that half the class said they would invest.
6.
Beautiful Legs; Direct Marketing Letter (see also section 4.2 if necessary, p 12)
We have chosen a well-known French hosiery company founded in 1829 called Dore
Dore to be our supplier. They have a number of advantages compared to the others that
we considered. They are willing to supply marketing material, such as samples and discounted
product.
- They are able to supply goods in small lot sizes. Production runs with special packaging require a minimum order of 2,000 units as
opposed to the industry average of 24,000 units.
- They have an excellent reputation for quality, especially in France
- They are willing to supply us on a weekly basis.
- Lead times are short. They can deliver within 5 working days of receiving an order, and the transportation time is less than 24 hours
- They wish to enter the British fine gauge hosiery market. They are established as high quality suppliers of men's and children's socks
- We have negotiated credit terms of 60 days, with a discount of 2.75% for payment within 30 days.
- They supply socks to other mail-order companies and thus have experience of our industry.
Thinking strategically (ie Porter), what concerns, if any, would you have with their choice of supplier and why? (be specific with the
framework language)