2011
The Business Plan
- Dream Homes Inc.
Teemu Toivanen
Dream Homes Inc. - ESB Comm 447
12/7/2011
Dream Homes Inc.
ESB Comm 447
Teemu Toivanen
Table of Contents
1.
Summary ................................................................................................................................................... 3
2.
Introduction............................................................................................................................................... 3
3.
2.1
About the Entrepreneur ..................................................................................................................... 3
2.2
Background and Industry Overview .................................................................................................. 3
2.3
The Mission ....................................................................................................................................... 4
2.4
The Goal and Objectives ................................................................................................................... 4
Operations Plan ......................................................................................................................................... 4
3.1
Organizational Structure and 5 Year Development Plan ................................................................... 4
3.2
Site Plan ............................................................................................................................................. 5
3.3
General Sales Process ........................................................................................................................ 5
3.3.1
Customer Inquiry ....................................................................................................................... 6
3.3.2
Finding the Apartment ............................................................................................................... 6
3.3.3
Designing ................................................................................................................................... 6
3.3.4
Renovation ................................................................................................................................. 7
3.3.5
Furnishing .................................................................................................................................. 7
3.4
The Average Business Day................................................................................................................ 7
3.5
Supply Management .......................................................................................................................... 8
3.5.1
4.
Inventories ................................................................................................................................. 8
3.6
Service Providers ............................................................................................................................... 8
3.7
Capital budget and capacity limits..................................................................................................... 9
3.8
Cost of Goods Sold, Gross Profit and Salaries .................................................................................. 9
The Human Resources Plan .................................................................................................................... 11
4.1
The Organizational Chart ................................................................................................................ 11
4.1.1
General Manager ..................................................................................................................... 11
4.1.2
Construction Supervisor .......................................................................................................... 12
4.1.3
Construction Worker ............................................................................................................... 12
4.1.4
Electrician ................................................................................................................................ 12
4.1.5
HVAC Engineer ...................................................................................................................... 12
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5.
6.
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Teemu Toivanen
4.1.6
Real Estate Supervisor ............................................................................................................. 12
4.1.7
Real Estate Agent .................................................................................................................... 12
4.1.8
Economist ................................................................................................................................ 12
Marketing Plan........................................................................................................................................ 13
5.1
Market Research .............................................................................................................................. 13
5.2
Service ............................................................................................................................................. 13
5.3
Pricing.............................................................................................................................................. 14
5.4
Promotion ........................................................................................................................................ 14
5.5
Place ................................................................................................................................................ 14
5.6
Competitors ..................................................................................................................................... 15
5.7
Marketing Expenses ........................................................................................................................ 15
Financial Plan ......................................................................................................................................... 15
6.1
Working Capital .............................................................................................................................. 15
6.2
Capital Budget and Operating Line of Credit .................................................................................. 16
6.3
Financing Budget............................................................................................................................. 16
6.4
Management Information System ................................................................................................... 16
6.5
Economic Forecast .......................................................................................................................... 17
6.6
Financial Feasibility ........................................................................................................................ 17
6.7
Risk Analysis ................................................................................................................................... 17
6.7.1
Break-even Analysis ................................................................................................................ 17
7.
Business Plan Summary.......................................................................................................................... 18
8.
Future Considerations ............................................................................................................................. 19
9.
References............................................................................................................................................... 20
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1. Summary
Dream Homes Inc. buys old apartments, renovates and furnishes them, finds customers from certain target
group and sells the apartments for profit. The process may start from a customer inquiry or the customer
could be found during the renovating period. The main idea is to create luxury brand for the company and
meet high standards in quality and service. After a few years of operations, renting out apartments becomes
an option to increase revenues. The goal is to become a turnkey service company, which means after meeting
with customers on one or two occasions they do not need to do anything else but move into a ready home. In
the first year of operations there is one employee in addition to the general manager, the goal is to renovate
five apartments and use outsourced work force as little as possible. In five years’ time the goal is to renovate
20 apartments a year. This means hiring new people to work for the company in order to reach the goal. Increasing the amount of renovated apartments will reduce the costs for supplies and materials, but the labor
costs will increase. The growth will happen gradually while taking cost effectiveness into account. The business will be located in Helsinki, the capital of Finland. Marketing is done mainly through exhibitions and the
target group will be well-educated couples without children. The business involves some equity to begin
with, but financing will mostly be covered by bank loan.
2. Introduction
2.1 About the Entrepreneur
Teemu Toivanen is a third-year Industrial Engineering and Management student on exchange from Metropolia University of Applied Science, Helsinki, Finland. Teemu is interested in real estate investing and renovating business and this business plan helps him organize his ideas into a practical outcome.
2.2 Background and Industry Overview
Investing in real estate has become popular in Finland. Only 1% of all apartments are suitable for investing
and finding suitable apartments is essential for the business to be successful. Most of the apartment buildings
are built in the early 1900s and are in a need of renovation. Taking into consideration that there is no space
for new buildings in Helsinki city center, renovation raises the value of the old apartments to equal the value
of the new apartments. In addition, Helsinki is one of the most expensive cities to live in in the world, yet the
job market and educational institutions attract people from other parts of the country.
The unstable world economy and the Finnish government’s unreliable retirement fund have been debated for
a long time and it is everybody’s responsibility to look for other options for economical safety in the future.
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2.3 The Mission
Dream Homes Inc. will offer its customers superior service that they have not experienced before. The business idea is to provide high standard homes for people. It is a turnkey service company and one-of-a-kind in
the market.
2.4 The Goal and Objectives
The goal is to earn good market image and create a recognizable brand after three years of operations. In the
long term, the goal is to own as many apartments as possible and gain profit with rental revenues. Moderate
growth is desirable, as is to be able to offer jobs to as many people as possible.
3. Operations Plan
Dream Homes Inc. will buy apartments, renovate and sell them for profit. Because apartments are fairly expensive to buy, the company also offers renovation services for people who already have an apartment, to
increase the revenues of the company. In the fourth year, the company also begins to rent out apartments, in
which case the payback time of investment is longer. The company-owned apartments serve as an inventory,
and if the company has some financial problems, they could be sold.
As a turnkey service the company needs to have good networks in various fields. The operations can be divided into three steps. The first step is finding the customer, the second is finding the suitable apartment and
the third step is the construction and renovation process. Ideally, the customer is found before the apartment
is bought or renovated, but these steps may happen in a different order as well. In any case, the customer has
to be found before the renovation is complete. The earlier the customer is found, the better and safer it is for
the business. Finding customers and apartments will require good people skills and knowledge of real estate,
in addition to networking with many other companies in the industry. The best apartments for investing will
be sold fast, so buying the apartments will require quick decision making. Some of the best apartments do
not necessarily even come for sale to open markets.
It is also very important to network with different construction and renovation companies in able to keep the
costs low whenever using outsourced workforce. High quality of the service and high standards of the renovation cannot be forgotten in any case. This is why finding the right people and companies to work with is
the key part of the success.
3.1 Organizational Structure and 5 Year Development Plan
Dream Homes Inc. will be a corporation. By being incorporated, investments are easier to acquire and the
personal risk is as minimal as possible. As the founder of the company, Teemu Toivanen will be the general
manager. In the first year, there is also one additional employee who has experience in the construction and
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renovation business. The stock will be divided 51/49 between the two employees, making the general manager leading shareholder. In the fourth year of the business when investing in apartments, the invested money
will be covered partly by splitting stocks between other investors. Ideally, these investors will be employees
of the company. In the first year, the goal is to renovate five apartments, which is fairly low workload for
two full-time employees.
Outsourced workforce will be used whenever needed or required by law. Some of the work has to be done by
certified professionals, like electricity and HVAC installations, which includes plumbing.
As the number of renovated apartments grows, necessary people to run the business will be hired. In the
second year, the goal is to renovate eight apartments. After three years of operations, another work crew will
be hired for the company. They will be in charge of the construction work and renovation, so that the general
manager can concentrate more on running the other business functions. However, the general manager will
still be helping in the renovation as needed.
After five years of operation, the goal is to be able to renovate 22 apartments. Marketing, finding the customers and creating a good image will become essential at this point. Finding the right kind of apartments in
good areas, buying them at a low cost and selling them with high profit is the main focus of the company. It
is important to keep in mind that finding the customers as early as possible makes the business much more
secure.
3.2 Site Plan
In the beginning and during the first five years of operations, no separate storage or office is needed. The
apartments serve as free storage space. There is no need to keep inventory because supplies and materials are
bought directly from the retail stores as needed. In addition, many retail stores like Ikea offer free delivery. A
truck will be bought for travelling and moving construction tools, paint, etc. from one apartment to another.
As the business grows, a separate office will be acquired for meeting with the customers and giving a positive image of the company. This will happen after five years of operations so it will be not included in this
business plan. The business will be located in Helsinki and the reasons for this will be explained in the marketing section.
3.3 General Sales Process
Ideally, the process begins with the customer enquiry. The general manager and the customer sit down together to find out what kind of apartment the customer is looking for, the desired location of the apartment,
and how it will be furnished. Also some kind of initial payment is taken and a contract is signed. Next the
general manager begins to look for a suitable apartment from the market. When found, the apartment will be
accepted by the customer. The general manager together with the customer will start designing the renova-
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tion phase. When necessary planning is complete, the actual renovation and construction phase can begin. In
the end, the apartment will be furnished as the customer wishes and the key to a ready apartment is handed to
the customer. Pictures of the renovation process will be added to the company’s website as a reference.
Customer
inquiry
Finding the
apartment
Planning &
Designing
Renovation
Furnishing
Figure 1: The general sales process
If the customer is not found in the beginning, the process may begin by finding an apartment that is suitable
for renovation and is from a popular area. Then, somewhere alongside the renovation process, the customer
is found and the apartment will be renovated as the customer wishes from that point. In some cases the
apartment can be fully renovated before finding a customer. In these cases knowing the customer needs and
good areas is important to be able to sell the apartment. In first year of operations, the turnover of the general
sales process is estimated to be from one to two months.
3.3.1
Customer Inquiry
The customer can contact the company by phone, email or through social media. The company website will
be linked to social media in able to make the contact details as visible as possible.
3.3.2
Finding the Apartment
Knowledge of the markets and good areas is important when finding suitable apartments. The wealth of the
housing cooperative is also important to take into consideration. This can be evaluated by condominium
payment. This is the payment that the owners of the apartments have to pay for the housing cooperative to
take care of the common amenities. Creating good relationships with real estate agencies is important so that
right kind of apartments will be found fast and effectively.
3.3.3
Designing
The general manager sits down together with the customer to discuss how the apartment will be renovated.
This might involve computer software and 3D simulations. In addition, many retail stores like Ikea have
good pictures of their products on their website.
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3.3.4
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Renovation
Renovation is the longest phase of the total sales process. Although the speed of the process can be raised if
the customer wishes, this will require outsourced workforce and will cost more. Naturally, the customer will
cover this extra cost. The time of the renovation depends on the size of the apartment, current condition and
the extent of the desired changes. There is no specific order in which the apartment needs to be renovated.
Naturally, it begins with disassembling the old flooring, the kitchen cabinetry, tiles, etc. This phase takes
approximately one to two weeks. After disassembling, the apartment has to be made ready for assembling by
sanding the walls, floors and ceiling and by cleaning the apartment. This will take less than a week. It does
not matter in which order the rooms are renovated. Usually the flooring is assembled last, so it will not suffer
any damage in the renovation. The renovation will include the kitchen, bathroom, floors and ceiling. The
walls will be either painted or wall-papered. Painting the walls and installing the wall paper will take one
week depending on how many coats of paint are needed. Installing the kitchen and renovating the bathroom
will take one to two weeks. Installing the laminate floor is quite easy and quick to do and will only take a
couple of days. Necessary electrical or HVAC improvements are done in day or so, as long as major problems are not detected. Cleaning the apartment for furnishing will take a few days.
3.3.5
Furnishing
Depending on the contract with the customer, the furnishing could involve simply moving the customer’s old
furniture into the apartment or buying and designing the apartment from scratch. This might include an outsourced designer and this will increase the total cost of the total sales.
3.4 The Average Business Day
The average business day depends on what phase of the general sales process it is. Some days the general
manager will be meeting with customers to design their dream homes. This could happen at the home office,
at their home or even in some quiet coffee shop downtown. Some days would involve marketing on exhibitions and/or searching for customers or suitable apartments. If the renovation process is ongoing, then the
average business day could involve driving the truck to the apartment, helping the construction supervisor
and working on the current renovation phase.
The business involves so many different things that even some average business days could involve all of the
above. A busy business day could be as follows: meeting with a customer to find out their needs for an
apartment and wishes for renovation at eight o’clock at the customer’s home outside downtown Helsinki.
After meeting with the customer some materials and supplies need to be purchased. Then, in the afternoon,
attending an exhibition in the downtown area to hand out as many brochures and business cards as possible
and meeting with possible clients. In the evening, some work still needs to be done in an apartment downtown before ending the workday.
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Later, in the fourth year of operations, the second crew will be concentrated on renovation only. Then there
will be more time for the general manager to concentrate on marketing and creating customer relationships.
3.5 Supply Management
In the beginning, most materials and supplies are bought from different retail stores because the quantity of
the renovated apartments is low. Tools, paint, wallpaper, laminate flooring and tiles are bought from different wholesale dealers like Bauhaus. Some of the tools, bathroom materials, and ready kitchens are bought
from Ikea. Other wholesale dealers or retail stores can also be used if necessary and they are cheaper. Later
when the quantity of renovated apartments grows, creating good relationships with suppliers becomes very
important. This way the cost of the supplies and materials can be decreased. One option is to buy materials
from countries like Estonia, where materials are cheaper. Estonia is only a few hours boat trip away from
Helsinki. However, it is important to maintain the high standards of the company and ensure good quality in
every case.
3.5.1
Inventories
One positive aspect of the business is that there are no inventories. This means that no money is invested on
materials or products. Buying an apartment is always risky. Nevertheless, in the fourth year of operations,
the company will acquire two apartments and in the fifth year two more to rent out. These apartments work
as an inventory for the company and if the business does not go as planned, then they could be sold and the
money could be used for something else.
3.6 Service Providers
Antti PutkiNurmi Tmi is a one-man company that is specialized in plumbing. He is an old friend of Teemu.
This company will be the main source of HVAC installations. There are many other companies to use in
Helsinki if this company is not available.
Jorvaksen Sähkö Oy provides good service and a competitive price in electricity planning and installations.
The company is over 30 years old and working in the extended Helsinki area. One worker of the company is
Teemu’s cousin.
There are many construction companies in the Helsinki area and there is no specific one yet chosen to be
used. To keep costs low, using students from universities and technical schools for part-time jobs is an option. This will include creating good relationships with different universities and institutions.
For designing and furnishing there are also many options available in Helsinki. Sisustussuunnittelijat – SI ry.
is a Finnish designer’s organization. Their website is www.sisustussuunnittelijat.com and it has all the licensed designers in Finland and their contact details.
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3.7 Capital budget and capacity limits
Dream Homes Inc. will not need extensive capital budget to start the business. In the first year of operations,
a truck is needed to move materials and tools from one place to another. It also functions as free advertising
by having a phone number on it. A computer will be purchased and necessary software acquired. Also some
tools will be bought.
Again, after three years of operations, when the second work crew is hired, there is a need to double the tools
and buy another truck. In the fourth year of operations, the company will also begin to rent out apartments
and it will need more capital to cover that cost.
The goal is to renovate ten apartments in the third year, which is believed to be the capacity of two full time
employees. In the fourth year, the second work crew is hired and the pace of the renovations is doubled. At
that time the capacity limit is 20 apartments.
The company does not really have capacity limits, because renovating apartments faster requires hiring more
people, which will just cost more to the customer. In this case, it is not about limited time, but rather money,
which depends on the paying customer. At the moment, the construction job market is quite loose, so it
would be easy to hire new employees.
Capital Budget
2011
2012
2013
2014
2015
Rental apartments owned
0
0
0
400 000
400 000
Tools
5 000
1 000
1 000
5 000
2 000
Computer, website and software
5 000
1 000
1 000
1 000
1 000
Truck
10 000
0
0
10 000
0
Total
20 000
2 000
2 000
416 000
403 000
Table 1: The capital budget
Dream Homes Inc. needs only 20 000 euros for capital expenditures, but in the fourth and fifth year the company will require 400 000 euros for investing in the apartments and renting them out.
3.8 Cost of Goods Sold, Gross Profit and Salaries
Salaries will not be a critical variable in the business, but having as few full-time employees as possible
makes the business more feasible. Taking the nature of the business into account, using just full-time employees is not practical. The business consists of different kinds of expertise during different phases of the
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general sales process. In the table, the number of the staff is a fraction because it could either indicate parttime or full-time employees. In this case, upon comparing the fifth year of operations to the organizational
chart, there might be only three full-time employees and the remaining employees work part-time. According
to this model, the base pay will be the same 25€/h for other staff and 50 000€/year for the manager.
The average cost of an apartment will be 200 000€ and the selling price will be 250 000€. The prices will be
explained furthermore in the financial section. If the customer has already found an apartment, the price of
the renovation only will be 30 000€ in the first year and that cost will rise gradually in the third, fourth and
fifth to 40 000€. The renovation cost is approximately 20 000€. The cost of the renovation will be kept low
by creating good relationships with suppliers and other reference groups.
Salaries
2011
2012
2013
2014
2015
Manager (full time)
1
1
1
1
1
Other Staff
1,0
1,6
2,0
3,0
4,0
Total Salaries and Wages
99 000
130 000
157 000
215 000
277 000
Number of Apartments Renovated & Sold
3
5
6
9
12
Number of Renovated
2
3
4
6
8
Number of Purchased & Rented
0
0
0
2
2
Total Number of Renovations
5
8
10
17
22
Renovated Apartment Sell Price
250 000
250 000
255 000
260 000
260 000
Purchase Cost/Apartment
200 000
200 000
200 000
200 000
200 000
Renovation Cost/apartment
21 000
21 000
21 000
22 000
20 000
Total Gross Profit/Apartment
29 000
29 000
34 000
38 000
40 000
15 %
15 %
17 %
19 %
20 %
Price of Renovation Only
30 000
30 000
35 000
40 000
40 000
Renovation Cost/Apartment
21 000
21 000
21 000
22 000
20 000
Total Gross Profit/Renovation
9 000
9 000
14 000
18 000
20 000
30 %
30 %
40 %
45 %
50 %
Number of Apartments
Gross Profits
Table 2: The cost of goods sold, the gross profit and the salaries
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4. The Human Resources Plan
4.1 The Organizational Chart
In the first three years of operations, the organizational chart will only include two full time employees: the
general manager and the construction supervisor. After first year of operations, the average time for renovating one apartment will be calculated and the result will be used in hiring needed full-time and part-time construction workers to help with the renovation process in the future.
Manager
Construction
Supervisor
Figure 2: The organizational chart of the first year
In the fourth year, another work crew is hired, which will double the number of possible renovations per
year. The general manager will be concentrating more on selling, creating customer relationships, marketing,
finance and other business functions.
In upcoming years, more people will be hired whenever necessary and when it is more cost effective than
using outsourced work force. This might include a real estate agent, an economist or full-time or part-time
construction workers.
4.1.1
General Manager
The general manager is in charge of running the whole business. In the beginning, this includes all the business functions, such as customer relationship management, marketing & selling, finance and also the construction and renovation process itself.
Later in third year when another work crew is hired, the general manager will concentrate more on parts
other than the renovation. When the number of renovated apartments grows, marketing and selling become
much more important for the company, which the general manager will put most of his efforts into.
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4.1.2
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Construction Supervisor
The construction supervisor is multitalented in the construction and renovation business. He will be in charge
of all the renovations and also hiring construction workers whenever necessary. He preferably has certificates to do electricity or plumbing installations himself and has an engineering degree.
4.1.3
Construction Worker
The construction worker will be an all-around worker who is not afraid to get his hands dirty. He is usually
seen moving things in and out the apartment, sanding and painting.
4.1.4
Electrician
The electrician is in charge of all the electricity installations. He will be first used as outsourced labor, but
later when the number of renovated apartments grows, a full-time electrician will be hired in the company.
4.1.5
HVAC Engineer
HVAC stands for Heating, Ventilation and Air Conditioning. The HVAC engineer has a university degree
and a license to work as a plumber. He will be first used as outsourced labor, but later when the number of
renovated apartments grows, a full-time employee will be hired in the company.
4.1.6
Real Estate Supervisor
The real estate supervisor is an experienced real estate agent in the Helsinki area. He is familiar with the
market as well as the prices. He has connections and networks on various real estate agencies in Finland and
gets to know first-hand information on available apartments. He also has a good reputation amongst customers which will be beneficial for the company.
4.1.7
Real Estate Agent
He is a young and ambitious seller who can sell anything. He did not finish his high school and since then
has tried to make his living by selling real estate and has been quite successful. His goal is to become the real
estate supervisor in the future.
4.1.8
Economist
He will be a young finance graduate who has always wanted to work in a small company where his results
are more noticeable. He is interested in politics and the world economy. He will be supervising the general
manager in investing and bank loans.
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Manager
Construction
Supervisor
Electrician
HVAC
Engineer
Real Estate
Supervisor
Construction
Worker
Economist
Real Estate
Agent
Figure 3: The organizational chart of the fifth year
5. Marketing Plan
5.1 Market Research
In order to discover the most profitable areas in Helsinki, a market research will be conducted. Also, finding
out what size apartments are most wanted is important. This information is important in a case where the
customer is not found in the beginning. The quantitative research method will be used.
5.2 Service
Dream Homes Inc. offers customers good knowledge of real estate in the Helsinki region as well as superior
renovation skills. The company is a turnkey service company, which means that after meeting on one or two
occasions with the customer, he or she does not have to do anything but move to a ready apartment. Dream
Homes Inc. will find the apartment, renovate it as the customer wishes, furnish it and just hand the customer
the key to the apartment. Any work the company cannot do itself will be addressed to the appropriate partnership company. The idea is that the customer does not need to go to a real estate agency to find an apartment and then to a construction company to get it renovated, but rather the customer only needs to come
meet with Dream Homes Inc. once or twice and the customer will receive his or her dream home.
In some cases, the customer has already found and bought the apartment. In that case, the service will only
include the renovation process. In the fourth year of operations, the company begins to rent out apartments.
In this case, the service is to offer customers high quality rental apartments.
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5.3 Pricing
The price will be competitive, but the service is unique. The customer is ready to pay a fee in exchange for
getting the home of their dreams. Many real estate agencies take 2-5% commission of the total trade. Renovation could take tens of thousands of euros, depending on the size, elapsed time and materials. Furnishing
and moving into the apartment always takes time and can be stressful. The price of the general sales process
of Dream Homes Inc. will be around 10%, which will include finding the apartment, planning and designing,
renovation and furnishing the apartment.
Base case scenario:
Purchase cost of an apartment: 200 000€.
Cost of renovation: 21 000€.
Selling price: 250 000€
Gross profit: 250 000€ - 200 000€ - 21 000€ = 29 000€, 11,6% of total trade
Competitors’ prices:
Purchase cost of an apartment: 200 000€
Commission 5%: 200 000€ * 0,05 = 10 000€
Cost of renovation: 5 000€ (excluding materials)
Gross profit total: 15 000€/215 000€ = 7% (materials 15 000€, which increases the value of the apartment)
5.4 Promotion
The purpose of the company is to offer high quality apartments, superior service and a unique experience.
The main marketing channel will be through different exhibitions. A website is set up and pictures of all the
renovated apartments will be uploaded there. The website will be linked to different social media like Facebook and Twitter.
The target group will be 25-35 year old couples. They already are in the working life and are busy with their
lives and do not necessarily have time to find their dream homes. They are well educated, fashion-conscious
and want to live in the best areas of Helsinki. Money is not an issue for these people and they are willing to
pay a little bit more for good service and making their lives a little bit easier.
5.5 Place
The location of the company will be in Helsinki, Finland. Helsinki is the capital of Finland. The population
of Helsinki is approximately 600 000, making it the largest city in Finland. The city is very old and most of
the apartment buildings in the city center were built in the early 1900s. There is no room to construct any
new buildings anymore, so the old buildings are either renovated or demolished.
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More and more people from other parts of Finland are moving to Helsinki because of job opportunities and
educational institutions. Because of the high demand for housing, the prices of the apartments are very high
as well. Helsinki is one of the most expensive cities to live in in the world.
5.6 Competitors
There are no direct competitors at the moment. However, there are many real estate agencies and construction and renovation companies in the Helsinki area. They are considered to be non-direct competitors. Networking with these companies is essential in order to be successful. Hopefully, there is no need for competition because the market is different. In fact, we could all benefit from each other by networking.
5.7 Marketing Expenses
In the first year, 5000€ will be spent on market research. Even though the money spent on marketing each
year technically remains the same, in relation to the number of renovations, the marketing costs decrease
each year. As the company has been in the market, word of mouth will attract more and more customers.
Getting a good reputation amongst the customers is the key to the success of Dream Homes Inc.
Marketing Expenses
Market Research
Brochures
Business Cards
Social Media
Total
2012
2013
2014
2015
2016
5000
4000
500
500
10000
0
4000
500
500
5000
0
4000
500
500
5000
0
4000
500
500
5000
0
4000
500
500
5000
Table 3: The marketing expenses
6. Financial Plan
6.1 Working Capital
The business of Dream Homes Inc. contains no inventories. All supplies and materials are bought as needed
or when necessary. Therefore, money does not need to be invested in inventories. On the other hand, at the
end of the fifth year, the company will own four apartments, which serve as inventory. Over time, the prices
of the apartments tend to rise more than inflation and investing in real estate is fairly beneficial in the long
term. In addition, some income can be received by rental revenues and this way some of the expenses can be
covered. In addition, the apartments serve as collateral when getting a bank loan.
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6.2 Capital Budget and Operating Line of Credit
As stated before the capital budget is fairly low at only 20 000€. In the fourth and fifth year, the company
begins to rent out apartments and needs more capital to do that. The amount will be approximately 220 000€
per apartment. The company also needs an operating line of credit to run the business. For the first year, the
operating line of credit is 220 000€, which is the money needed to buy and renovate one apartment. There is
1-2 months’ time to sell the apartment and the money from the sale will be invested in the next apartment
and customer. In the fourth year, when the second work crew is hired, the operating line of credit will be
doubled to 440 000€. In cases where the customer already has found the apartment, there is less money
needed for the operations. In this case, the operating line of credit will be equal to the renovation cost only.
It is important to find customers that already have the apartment so that there is less money needed for the
operations. Ideally, these two types of customers will alternate, in order to need as less operating line of credit as possible.
6.3 Financing Budget
Dream Homes Inc. will need 90 000€ of capital investment, which will cover the start-up cost, running the
business and the first two year’s losses. This will be covered by equity investment. In the third year, the
company reaches the break-even point and in the fourth and fifth year, it begins to make profit. In the fourth
year, the pace of renovations is doubled and another work crew will be hired. Also, renting out apartments
begins in fourth year of operations. This will need more equity which will be covered by a bank loan and
equity investments. A total bank loan of 300 000€ will be acquired for the purpose of investing in apartments
in the fourth and fifth year. The operating line of credit needs some financing and this will be covered by the
bank loan as well. All the net profit will be invested in new apartments and back to the company during the
first five years of operations and no dividends are paid during that time. Ownership of the company will be
sold as common stock and buying a share of the company is an option for the employees, in which way some
of the financing will be covered.
6.4 Management Information System
The most important variable for the success of the company is the cost of the apartment and the selling price.
In other words, the amount of value that can be gained by renovating an apartment and the amount of money
the customer is willing to pay to find his or her dream home. This is the most important information that
should be monitored in every sales case. Also, the cost of the renovation is important and creating good relationships with suppliers and networking with other industries and companies is essential. These variables and
relationships have to be re-valuated at least yearly.
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6.5 Economic Forecast
In the financial model it is assumed that the inflation would be 3%. In Finland, the corporate taxes are 26%
for the profit and the losses can be carried forward for the next year for the tax returns. The debt of interest
rate is assumed to be 5% for this kind of business, where the apartments can be used as collateral.
6.6 Financial Feasibility
The required rate of return for this business is 15%. This estimate is quite realistic concerning the nature of
the business. With this rate of return, the internal rate of return is approximately 30%. Nevertheless, the IRR
is very sensitive to critical variables. These are the cost of an apartment, the selling price, the cost of renovations and the turnover of an apartment. Marketing is the main factor to influence the profit of one apartment
as well as the turnover. The cost of renovations will be decreased by creating good relationships with suppliers and networking with other companies.
Change
Cost of apartment increase 2%
Cost of apartment increase 5%
Cost of apartment increase 10%
Selling price decrease 2%
Selling price decrease 5%
Selling price decrease 10%
Cost of renovations increase 20%
IRR
27 %
20 %
4,4 %
26 %
16 %
-30 %
21 %
Table 4: The effect of the cost and the selling price on the IRR
6.7 Risk Analysis
The state of world economy should be kept in mind because, especially in Europe, the economy at the moment is very unstable and fragile. The currency of Euro might even fall, causing loans to become very expensive and the cost of the apartments to decrease dramatically. In this case, the whole business plan should
be reviewed and the numbers and variables re-evaluated. Investing in apartments becomes very cheap, but on
the other hand, there are fewer customers willing to buy them because of uncertainty of the future.
6.7.1
Break-even Analysis
The profitability of the company is very sensitive to its critical variables. This can be noticed in the breakeven analysis. We can also find out that the break-even points do not have a critical effect on the IRR. However, there are four critical variables, which could all change at the same time.
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Year
Teemu Toivanen
2012
# of Apartments
Goal
Cost of Apartment
Cost of Renovation
2014
2015
2016
5
8
10
15
20
11
11
8
7
6
Base case
250 000
250 000
255 000
260 000
260 000
Break-even
270 000
260 000
255 000
245 000
240 000
Base case
200 000
200 000
200 000
200 000
200 000
Break-even
180 000
195 000
205 000
215 000
225 000
Base case
70 %
70 %
60 %
55 %
50 %
Break-even
33 %
59 %
68 %
80 %
84 %
Break-even
Selling Price
2013
Table 5: Break-even analysis
Break-even and IRR
35%
30%
25%
20%
15%
10%
5%
0%
# of
Apartments
Selling Price
Base case
Cost of
Apartment
Cost of
Renovation
Break-even
Chart 1: The effect of the break-even on the IRR
7. Business Plan Summary
The business plan demonstrates the opportunity of this business, but also the many risks involved. The risk to
begin and run the business is quite low, but making it profitable and cost-efficient is very challenging. There
is a lot of competition between real estate agencies and renovation companies in the Helsinki area and creating a good brand image amongst customers is the key factor to success. Marketing plays a big role in creating this image and marketing should be given much thought right from the beginning. The business opportunity is clear and feasible.
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8. Future Considerations
After five years of operations, the business can be easily adjusted to any size apartments and even houses.
Buying entire apartment buildings and renovating the apartments collectively becomes an option too, but this
needs a lot of equity. Ultimately, all the people in Finland are possible customers because everybody needs a
home to live in. The business can be expanded to other cities and later the whole country of Finland can be
covered.
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9. References
Venture Management: Building Your Business with a Business Plan (Course Manual): Painter, Marv, Edwards School of Business (2011)
www.rakentaja.fi
Information regarding construction and renovation business.
www.vero.fi
Information about taxation in Finland.
www.tilastokeskus.fi
Statistics of Finland.
www.oikotie.fi
Information regarding real estate.
www.etuovi.com
Information regarding real estate.
www.varallisuusvalmennus.fi
Information regarding investing in real estate
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