THE FRAMEMAKERS
1.
What aspects of Robert and Teresa Norman’s background would contribute
to success if they decide to go ahead with the picture-framing store?
The Norman’s have several things going for them if their decision is to proceed
with the new business.
a.
Robert has had business and interior design college training –
both aspects should be helpful in managing the new business.
b.
Both Robert and Teresa enjoy working with people and have had
considerable retail experience. The new business will
undoubtedly involve this type of customer contact.
c.
The Normans have some background in the picture framing
business having done it on the side for the some time.
d.
Robert is independent. He does not enjoy working for others.
e.
Teresa is interested in and is very fond of framing.
f.
The business may have more growth opportunities than the
painting business which to some extent is limited being a service
business because of the expertise of the owner.
g.
The proposed business is something both Robert and Teresa
enjoy.
2.
What positive things have Robert and Teresa done in investigating the
feasibility of the new store and what additional information might they have
collected? From what sources could this information be obtained?
The Normans have done several positive things in their investigation:
a. They have talked to a manager of a framing shop and has learned valuable
information about the operations.
b. They have learned about industry growth and have made contacts with the
industry association, suppliers and other dealers.
c. They have subscribed for the trade magazines which are relevant to the
proposed business.
d. They have prepared a preliminary evaluation of saturation of this type of
business in the City
of Brandon and a per customer profit analysis.
One of the first things Robert should be doing at this point is to evaluate the new
opportunity relative to his goals, capabilities, and experience. He should also collect
more information in
order that he can prepare a financial feasibility study for the
proposed business.
For example: Market Potential:
a. He did not clearly define his market area. Was it just the City of Brandon or a
surrounding area as well? What is the population of this area? This information
is likely available form the City of Brandon or the Brandon Chamber of
Commerce.
b. He has no idea of sales revenues in the market area for this type of business.
He may be able to obtain this information from provincial or municipal
government sources. If this is not available, per capita expenditures from Federal
Government data may be helpful. The $32.00 spent per customer is helpful but
Robert needs to get some idea of number of customers that he can expect.
Another weakness of the secondary data is that it is for the "typical" store. Robert
needs to obtain some information about "his" store in Brandon. He may solve this
problem and lack of availability of secondary data by doing a consumer survey for
his market to assess level of demand for the store.
c. Some adjustments to the secondary data may be required. These would involve
such things as updating the data, and allowing for in-shopping from the outlying
regions around Brandon. The result of estimating market potential should be a
dollar revenue based on number of customers multiplied by the amount spent per
customer.
Market Share: Robert should then calculate a potential market share by
multiplying his store's
share of retail-service capacity by the market potential. This
capacity probably could be measured
in square footing devoted to framing in the
city. He should also make some adjustments to this
amount by assessing consumer
satisfaction with the existing store in Brandon (which could be
obtained from the
survey), and by assessing the competitive strengths and weaknesses his store
might have. The above information could provide an estimated sales revenue amount
Robert and
Teresa could expect for the first year.
Projected Income Statement: Using the figure obtained from the market share
calculation
combined with the expense figures already obtained, Robert should
be able to construct a
projected income statement. He may be well advised to
verify the material and overhead
expense figures of his business for the Brandon
area. As part of the financial feasibility he
should also calculate start-up costs.
Robert and Teresa also probably moved too quickly in
closing down the
painting business. They should have at least waited until they had collected
some of this data.
3.
From the information provided, evaluate the business plan they have
prepared from their new business.
Robert has covered some of the key aspects of a business plan such as target
market, financial requirements, location, personnel, layout and regulations.
However, he has left some critical points out of the plan.
Objectives: Robert's only objective is to own a "big" business "someday." He
should try to quantify this goal and others if possible and set a time limit. Sales
and profit targets for the first year would be a good place to start.
Market Approach: Although he has defined his target customer he hasn't obtained
information about its size, characteristics and needs. He also needs to do more
work on firming up his plans for his marketing mix (i.e., product, pricing, location
and promotion) in response to the target market's needs.
Robert may be overlooking some important environmental influences such as the
(potential) competition in Brandon, and the economy's influence on the business.
More data could be obtained on the trend to do-it-yourself picture framing as well
as any legislation that might affect the business.
Financial: It doesn't appear Robert has done a very thorough job of estimating the
financial requirements for the business. This was discussed in Framemakers part
II. He has taken much of his data from the store in Winnipeg. A part of his
business plan should include the type of financial record keeping he will employ
as well as operating standards which can be evaluated.
Personnel: Even if he and Teresa do not plan to hire anyone at present, they
should set down a division of responsibilities between themselves and begin
developing plans for the recruitment and management of other employees as the
business grows.
Physical Facilities: Robert again appears to be approaching this aspect of
planning in a haphazard way. Estimates should be obtained and evaluated before
purchases are made. The location decision appears also to have been made
without much evaluation although there was recognition of the need for a high
traffic location.
Regulations: Robert knows he must obtain a business license. There are several
other potential regulations which should be investigated however. Does he need a
provincial license as well as one from the city? Are there any zoning regulations
which preclude the Framemakers type of business in certain locations? What
taxes apply to the business? Would incorporation reduce some of the risk in
starting the business? Robert would be well advised to consult a lawyer in
seeking answers to these questions.
4.
Weigh the relevant pros and cons for the Normans of operating a U-Frame-It
franchise instead of starting their business from scratch.
The relevant pros and cons to franchise for the Normans are:
Pros
-
They have little experience in the industry. A franchise would provide
considerable training to overcome this deficiency which could be
especially valuable during start-up.
They would have some instant recognition of the name to help with
market demand. This may help them in planning and obtaining needed
financing.
The franchiser may provide additional services such as location selection
(a very important aspect in this situation), interior layout, training,
advertising, possible financing and would undoubtedly speed up the
establishment time.
The "U Frame It" franchise is looking at expanding to Brandon even if the
Normans do not sign on with them. This will be additional competition.
-
-
-
Cons
-
5.
The $20,000 franchise fee would be particularly burdensome for
the Normans.
Robert appears to be very independent and would no doubt resent
franchiser monitoring and restrictions over their operations.
It is unclear without further research what increase in sales would come
from affiliation with the franchise.
There is potential for non-delivery of franchiser obligations in terms of
training, advertising, discounts, etc.
Evaluate the Norman’s initial approach to obtaining financing for The
Framemakers.
Robert and Teresa were due to run into difficulties obtaining financing because
of their lack of investigation. Some of the things they could have done to alleviate
the problem are as follows:
- Give some thought to the proportion of debt versus equity they would
employ. Perhaps
they might have obtained equity financing from family or
prospective partners.
- Much more care should have been taken in obtaining estimates of financial
requirements. This information should have been tailored to Framemakers in
Brandon rather than a
"typical" store in Winnipeg.
This would have involved utilizing both secondary and primary sources such as
checking with government agencies and suppliers of necessary inventory and
equipment.
- The Normans might have investigated the possibility of obtaining financing
from government sources. It appears that they were aware of this source.
- The investigation of financial requirements should have taken place well in
advance of the need for funding. This would have resulted in much less stress
on the Normans as the store opening approached.
- each item of start-up and operating costs should be sourced if possible with
some backup
for "estimates."
6.
Assuming you are the banker, evaluate the financial requirements and
projections Robert and Teresa prepared.
From the information provided in the case, we can see that Robert
underestimated several items. In general, a verified source for each item on both
statements should have been provided. Once again Robert appears to have been
following the P.P.F.A. averages rather than obtaining information specific to
Brandon. The P.P.F.A. averages also reflect results of businesses currently operating
- not one just starting up.
Based on the format, it is easy to see why the banker required the Normans to
rework their
statements several times.
Some of the specific weaknesses of the proposal, some of which were
mentioned, are:
Proposal Requirements
Inventory - 4000 appears low - should have used amounts from existing stores
Equipment & Fixtures - low - should have obtained specific quotes
First Month's Rent - should have verified amount from landlord
Utilities & Phone deposit - should have verified amount from utility and phone
company.
Supplies - did not estimate an amount for supplies
Contingency - should have budgeted an amount for contingencies First Year
Projection
Revenue - 76,800 - should have made this estimate by looking at more than
P.P.F.A. averages i.e. - Winnipeg stores, adjust for Brandon and its competitive
situation, surprising that Framemakers was new and would take some time to
build up a clientele.
Expenses - 57,600 - these should have been itemized and verified rather than rely
on P.P.F.A. estimates only i.e. cost of goods sold, salaries, supplies, promotion,
rent, utilities, interest, phone, repairs, and depreciation. Each of these expenses
could have been different for framemakers than for the average framing shop.