1. Based on the financial analysis, the purchase of The Peach Tree and the plan to convert
it into a boutique hotel could represent an attractive opportunity for D'Arcy and Whiting.
The hotel is located in a desirable location with high occupancy rates. The conversion
project is estimated to cost $1.5 million, but the expected return on investment is 20%.
This suggests that the project could be profitable for D'Arcy and Whiting. However, there
are also some risks associated with the project. The hotel market is competitive, and
there is no guarantee that the boutique hotel will be successful. Additionally, the
conversion project could be more expensive than expected, or it could take longer than
planned. Overall, the purchase of The Peach Tree and the plan to convert it into a
boutique hotel could be an attractive opportunity for D'Arcy and Whiting. However, it is
important to carefully consider the risks involved before making a decision.
2. The analysis they have performed on the deal structure is thorough and well-reasoned.
They have considered a variety of factors, including the valuation of the company, the
amount of capital needed, and the terms that would be attractive to investors. Several
principles should guide the structuring of the deal used to raise equity capital. These
include:
a. Fairness: The deal should be fair to both the company and the investors. This
means that the valuation of the company should be reasonable and that the
terms of the deal should be in line with industry norms.
b. Alignment of interests: The deal should align the interests of the company and
the investors. This means that the investors should have a strong incentive to
help the company succeed.
c. Flexibility: The deal should be flexible enough to accommodate the needs of both
the company and the investors. This may involve providing investors with certain
rights, such as the right to appoint a board member or to veto certain decisions.
Several specific deal structures and terms for investors make the most sense.
These include:
a. Pre-money valuation: The pre-money valuation is the value of the company
before the new investment is made. This is an important factor in determining the
amount of dilution that the existing shareholders will experience.
b. Post-money valuation: The post-money valuation is the value of the company
after the new investment is made. This is the valuation that will be used to
calculate the ownership percentage of the new investors.
c. Equity stake: The equity stake is the percentage of the company that the new
investors will own. This will depend on the amount of money that the investors
are investing and the pre-money valuation of the company.
d. Liquidation preference: The liquidation preference is the priority that the investors
will have to receive their money back in the event of a liquidation of the company.
This is important to investors because it protects them from losing money if the
company is not successful.
e. Conversion rights: Conversion rights allow the investors to convert their preferred
shares into common shares at a certain price. This is important to investors
because it gives them the opportunity to participate in the upside of the company
if it becomes more successful.
Based on the analysis they have performed, D'Arcy and Whiting should propose a deal
structure that includes a pre-money valuation of $10 million, a post-money valuation of
$12 million, an equity stake of 25% for the new investors, a liquidation preference of 1x,
and conversion rights that allow the investors to convert their preferred shares into
common shares at a price of $15 per share. This deal structure would be fair to both the
company and the investors and would align their interests. It would also be flexible
enough to accommodate the needs of both parties. It is important to note that this is just
one example of a possible deal structure. The specific terms of the deal will depend on a
variety of factors, including the negotiating power of the company and the investors, the
overall market conditions, and the specific needs of the parties involved.
3. D'Arcy and Whiting should have a frank discussion about their respective ownership
stakes and the issue that Mr. D'Arcy has raised. They should be open to negotiating a
solution that is fair to both parties. Mr. D'Arcy is concerned that he is putting in more
money and his daughter is putting in more effort than Ms. Whiting, and that this is not
reflected in their ownership stakes. He is also concerned that Whiting's connections to
the hotel industry could give her an unfair advantage. Whiting, on the other hand, is
concerned that Mr. D'Arcy is trying to renegotiate the terms of their agreement after the
deal has already been made between her and D’Arcy’s daughter. She also believes that
her experience and expertise in the hotel industry are worth more than Mr. D'Arcy's
financial contributions. The two partners need to find a way to compromise that
addresses Mr. D'Arcy's concerns without undermining Whiting's contributions. One
possible solution would be to adjust the ownership stakes to reflect the relative
contributions of each partner. For example, Mr. D'Arcy could receive a slightly larger
ownership stake in exchange for his higher investment. Another possibility would be to
give Mr. D'Arcy a greater say in the day-to-day operations of the hotel. This would give
him more control over the company and make him feel more like his contributions are
valued. Ultimately, the best solution will depend on the specific circumstances of the
case. However, it is important for both partners to be open to compromise and to find a
solution that is fair to both of them.