Business Performance
\nAssessment 3 \u2013 Case study
\nBackground information
\nDonnys Boutique Pet Stores (Donnys) was established in 2012 as a specialist retailer of luxury pet foods and goods. Donnys was founded by Thomas and Rebecca O\u2019Donnell as a private company in Australia. Thomas and Rebecca each own 50% of the share capital. From its early days, Donnys sought to differentiate itself from its competitors by offering boutique brands to dog and cat owners who love to spoil their pets.
\nStarting with two stores in high-income suburbs of Sydney, Donnys grew steadily and currently has twelve stores in Australian cities.
\nMission statement
\nDonnys is a boutique, customer-focused business. Its mission is as follows:
\nWhere your pets always come first \u2013 a total experience for dogs, cats and owners, Donnys is proud to be at the forefront of pet nutrition, pet fashion, pet accessories and pet grooming.
\nStrategic objectives
\nDonnys has grown to be a strong brand, and its stores receive a high proportion of repeat business from loyal, local customers. However. Thomas and Rebecca feel the growth in revenue from existing stores has reached saturation point and they are looking for ways to expand the business. While Donnys\u2019 stores have been profitable to date, despite high rental costs in premium locations, the O\u2019Donnells are aware that the \u2018bricks and mortar\u2019 retail industry is declining overall. They have abandoned plans to expand their retail network into regional Australia and have accepted that growth will most likely require investment in an online sales channel. This will allow them to reach regional Australia, as well as current customers who appreciate the convenience of online purchasing.
\nThe O\u2019Donnells have recently met with an IT consultant and been quoted $800,000 to develop and launch a full
\ne-c ommerce strategy. With limited IT capability within the business to date, Thomas and Rebecca are nervous about investing in this strategy, although they know the existing business model may not be viable in the long term.<\/p>\n
Acquisition opportunity
\nOllieandOscar.com is an online luxury pet goods retailer founded in Perth by Amalia Rompedo in 2016. The business is registered as a company, Ollie and Oscar Pty Ltd (Ollie) wholly owned by Amalia. Ollie is well known for its boutique pet products, including a number of exclusive brands. It offers a wide range of cat and dog products including:
\n\u2022 dog and cat food, toys, accessories, beds
\n\u2022 an exclusive range of cat and dog collars and bandanas
\n\u2022 an exclusive range of high-protein, low-calorie dog biscuits.
\nTo date, 95% of Ollie\u2019s sales have been in Australia and 5% in New Zealand. Amalia had been planning to pursue further growth in New Zealand, but due to the declining health of her elderly parents, she is likely going to have to return to her home country of Spain, where they live. She is reluctantly looking to sell the business and has engaged a broker, Adrian Tan, to find a buyer.
\nAdrian has approached Thomas and Rebecca O\u2019Donnell with the opportunity and provided an information memorandum.
\nYour role
\nThomas and Rebecca are interested in learning more about Ollie and have approached their accounting firm, CBD Associates, for Helpance.
\nYou are a Chartered Accountant working for CBD Associates. Your manager has sent you an email (below) asking you to evaluate the opportunity for Donnys to acquire 100% of the share capital in Ollie and prepare a report for Thomas and Rebecca with your initial findings.
\nAfter you receive this request from your manager, Amalia contacts CBD Associates as she would like to invite the person working on the valuation out to dinner so she can discuss her situation around her need to return to Spain. She indicates that she is facing significant medical costs from the deteriorating health of her parents. She is very interested to discover how keen the buyer is to purchase as she wishes to ensure that she obtains the best price possible for her business.<\/p>\n
Your manager\u2019s email
\nTo: You
\nFrom: AManager@CBDAssociates.com.au
\nSubject: Ollie and Oscar Pty Ltd
\nAdrian Tan (Amalia\u2019s broker) has provided us with an information memorandum, which includes a market-based valuation of $2.9 million based on earnings before interest, taxes, depreciation, and amortisation (EBITDA multiple). Please comment on Adrian\u2019s valuation approach and compare it with an income-based approach using forecasted discounted free cash flow (DCF) over the next five years and the assumptions below.
\nThomas and Rebecca need advice on how to fund the acquisition. Please consider that aspect based on the asking price of $2.9 million, as well as your income-based valuation. The relevant IBIS reports may provide more information about industry prospects and key players.
\nValuation assumptions
\n1. The following are based on Ollie\u2019s performance to date and industry trends over a five-year period:
\n(a) Sales growth of 7.9% per year in line with industry (see IBIS report).
\n(b) Gross margin percentage maintained at 2021 rate.
\n(c) Salaries and wages to increase by 1% in year 1 and in year 2 and by 1.5% per year thereafter.
\n(d) Rent is expected to increase at a rate of 1.5% per year in line with inflation.
\n(e) Marketing spending is expected to be 11% of revenue in years 1 and 2, decreasing to 9% thereafter.
\n(f) General and administrative expenses will increase to 5% of revenue per year.
\n(g) The applicable tax rate is 26%.
\n(h) Property, plant, and equipment (Ollie\u2019s website and related technology) is depreciated on a diminishing value basis at 20% per annum.
\n(i) Working capital \u2013 based on all current assets less all current liabilities, as a percentage of gross profit \u2013 will be maintained at the 2021 level.
\n2. Donnys weighted average cost of capital (WACC) is 10%.
\n3. The terminal value growth rate is 2% beyond year 5.
\n4. Assume cashflows occur evenly throughout the year. Additional things to note:
\n\u2022 Amalia hasn\u2019t been paying herself a salary. So, you\u2019ll need to factor in $75,000 per year for an Online Sales Manager in year one and adjust each subsequent year as per 1.c) above.
\n\u2022 Capital expenditure on upgrades to the IT infrastructure is expected to be $400,000 in year 1, $250,000 in year 4 and $150,000 in year 5. (***Those are fixed assets, therefore, need to depreciate, you must refer how depreciation is calculated in the sample worksheet. In there, deprication is calculated by just average the existing P & E and new capex together by dividing by 2 )
\n\u2022 Thomas and Rebecca recognise the businesses would overlap and understand that Ollie\u2019s growth will come at the expense of Donnys\u2019 retail sales. They estimate Donnys would lose approximately $320,000 in sales in the first year as a result of the acquisition. (This is a potential risk that you can use for Q7)
\n(Regards,
\nAM<\/p>\n
Required
\nYou need to submit three (3) files for this assessment:
\n\u2022 An email, in a word document, identifying and analysing any ethical issues identified in the scenario (preferred format is Microsoft Word (DOC\/DOCX). (Please refer the question 1 below)
\n\u2022 A 2000-word report including an executive summary (preferred format is Microsoft Word (DOC\/DOCX).
\n(Questions to answer and word limits are mentioned below)
\n\u2022 A spreadsheet file (preferred format is Microsoft Excel (XLS\/XLSX) containing: (This is the answer for question 2 below)
\n\u2013 workings for calculating the business valuations using DCF (You must refer the attached sample work sheet in order to understand how to do this. You must use formulas to show where you got the numbers like In the sample file.)
\n\u2013 supporting calculations for Donnys capacity to fund the acquisition
\n\u2013 sensitivity analysis.
\nThe content of the three (3) files is detailed below.
\nQuestions:
\nEthics
\n1. Prepare an email to your manager outlining how you plan to respond to Amalia\u2019s invitation by identifying and analysing potential ethical issues of attending such a meeting. (200 words)
\n(you need to identify two ethical issues from 05 fundamental ethics and analyze them from the Amelia\u2019s invitation)
\nReport
\nPrepare a report for Thomas and Rebecca O\u2019Donnell, assessing the opportunity for Donnys Boutique Pet Stores to acquire Ollie and Oscar Pty Ltd. The report will include an executive summary and address the items listed below. It should be no more than 2,000 words (excluding references and the valuation model).
\nExecutive summary
\n1. An executive summary.(200 words)
\n(you need to provides comprehensive, clear and logical executive summary covering four key aspects
\n4 key aspects are:
\n**Valuation ** Funding ** Risk ** **Recommendations
\nValuation
\n2. Evaluate the appropriateness of the market-based valuation in the information memorandum.
\n(300 words- 75 words for each Assessment)
\nYou must write 2 appropriate and 2 inappropriate. (I have given 2 inappropriate examples below.)
\nAppropriate
\nI.
\nII.
\nInappropriate
\nI. Selected benchmarks are not appropriate then Use of multiplier is not appropite. Look at the market based valuation in Appendix 1 in this document). Eg Greencross is a huge company compare to Olly. And Pet stock is very small..
\nII. Comparison of companies. Eg not all the companies are online based.
\n3. Calculate a business valuation of Ollie and Oscar Pty Ltd using an income-based valuation method and the assumptions in the email from the manager.
\n\u2022 A spreadsheet file (preferred format is Microsoft Excel (XLS\/XLSX) containing:
\n\u2013 workings for calculating the business valuations using DCF (You must refer the attached sample work sheet in order to understand how to do this. You must use formulas to show where you got the numbers like In the sample file.)
\n\u2013 supporting calculations for Donnys capacity to fund the acquisition
\n\u2013 sensitivity analysis.
\n\u2013
\n4. Compare the market-based valuation with the income-based valuation and justify a reasonable valuation range.
\n(300 words \u2013 75 words for each justification)
\nProvides comprehensive, clear and logical comparison of the market-based approach (2.9M) compared to the income-based valuation for Ollie and Oscar Ltd covering four key points. You must ensure the guidance on valuation range is clear and highly convincing. Justification aligns directly with the analysis.
\nI.
\nII.
\nIII.
\nIV.
\nFunding
\n5. Evaluate the capacity of O\u2019Donnells to fund the acquisition via debt. (150 words)
\nYou need to make 4 clear, logical and comprehensive points about the O\u2019Donnells capacity to fund the acquisition of Ollie\u2019s by using debt. Your calculations should support a certain position in regards to the D\/R ratio. This would be assumed knowledge. You have your acquisition purchase price you need to work out whether Donny\u2019s can finance the whole price by using debt \u2013 when they have covenants that need to be kept with the bank and loans falling due.
\n6. Identify and critique one (1) other funding method available to the O\u2019Donnells. (150 words)
\nIdentifies alternative funding with highly comprehensive critique of alternative funding source.
\nRisk
\n7. Using the risk profile and risk assessment matrix, choose four business risks that may impact your valuation. For each risk, calculate a revised valuation assuming the risk occurs and evaluate its impact on your valuation.
\n(400 words \u2013 100 words for each risk and its Assessment of the impact to the valuation)
\n(to answer to this question, there should be one revised calculation in the excel sheet and then Provides comprehensive, clear and logical Assessment of impact on the valuation of the four chosen business risks. You must refer to the risk register and risk matrix to the bottom of this document.
\nI will give you 3 risk, you add another risk. Remember you should adjust the impact of these four risk variables in the revised calculations in the excel sheet. (highlight the four risk variables in the worksheet.)
\nRisk 1 – Amelia\u2019s Dependency (see the risk matrix). leaving can cause capital expenditure requirements as might have to hire someone for more higher salary.
\nRisk 2 \u2013 loss of sales and cannibalization of sale from each other (320,000 sales loss)
\nRisk 3 \u2013 Infrastructure cost increase due to new purchase (financial risk \u2013 see risk matrix for evaluate the impact of this risk)
\nRisk 4 –
\nYou must provides comprehensive, clear and logical Assessment of impact on the valuation for each four risks above.
\n8. Using a data table, evaluate the impact on your original valuation of a 1% unfavourable movement in both the growth rate in the terminal value and in the WACC (separately) and provide appropriate brief commentary.
\n(100 words \u2013 50 words each for brief commentary for terminal value and WACC movements)
\n(Once you done the initial calculation, you can only change the % of terminal value and WACC. So other number should change accordingly when changing terminal value and WACC as numbers must be formulated and linked. So copy the original data into new tab and show the changes when terminal value is at 1% and WACC is at 9%)<\/p>\n
Recommendation
\n9. Recommend how the O\u2019Donnells should proceed. (200 words)
\nOther than calculations, you must refer attached IBIS reports to support your answer.
\nAppendix 1
\nExtracts from the information memorandum The opportunity
\nAmalia is seeking a sale price of $2.9 million for 100% of the shares in Ollie and Oscar Pty Ltd.
\nThe business has seen significant growth in recent years and is well-positioned to take advantage of growth in the online pet retail industry.
\nOllie and Oscar Pty Ltd state-of-the-art e-commerce site currently offers 3,000 products. The online infrastructure has capacity for significant growth, but this will require capital expenditure in the near future.
\nPurchasing Ollie and Oscar Pty Ltd gives access to a profitable established online business, as well as intellectual property relating to its exclusive brands.
\nMarket-based valuation
\nA valuation has been prepared using a market-based approach as follows:
\na. Recent small business sales we have brokered have yielded on average a multiple of 2.7 of sales price to EBITDA.
\nb. According to the IBIS report for Greencross Pty Limited (owner of Petbarn stores in Australia and Animates stores in New Zealand), Greencross is trading at an EBITDA multiple of 6.9.
\nThis produces a valuation range of $1.6 million to $4.1 million, and a mid-point of $2.9 million.
\nSmall business Ollie (mid point) Greencross
\nOllies 2021 EBITDA ($) 596,271 596,271 596,271
\nMultiple 2.7 4.8 6.9
\nMarket value ($) 1,609,932 2,862,101 4,114,270
\nc. Recent small business sales*
\nRecent sales – small business
\nBusiness
\nAnnual revenue $
\nEBITDA $
\nSales price $
\nMultiple
\nType
\nSage Candle Ltd (online) 1,956,004 90,000 295,000 3.3 Online
\nTerrys T-shirt Printing Pty Ltd 650,000 35,000 100,000 2.9 Online
\nAuckland Book Stores Ltd (online) 2,205,600 60,000 198,000 3.3 Retail
\nDaisys Dog Grooming Pty Ltd 200,000 30,000 60,000 2.0 Service
\nEMI Merchandise Ltd 4,320,875 750,000 1,500,000 2.0 Online<\/p>\n
Average
\n2.7
\n*The information in this table is fictitious.<\/p>\n
d. Greencross Pty Ltd
\nComparable industry – Greencross (Petbarn and Animates stores)
\nGreencross valuation
\n2019 equity value $ Million
\n506
\nLess debt (15)
\nEnterprise value 491
\n2019 EBITDA 71
\nEBITDA multiple 6.9
\n(Source: IbisWorld 2022, Greencross Pty Limited – Australian Company Profile, accessed 15 February 2022,
\nhttps:\/\/www.ibisworld.com\/au\/company\/greencross-pty-limited\/413475\/
\nAppendix 2
\nOllie and Oscar Pty Ltd: 2021 financial statements
\nYear ended 30 June 2021
\nStatement of profit and loss A$
\nRevenue
\n2,965,580
\nCost of goods sold (1,579,358)
\nGross profit 1,386,222
\nExpenses
\nSalaries and wages
\n(185,000)
\nRent (120,000)
\nMarketing (350,875)
\nGeneral & admin (134,076)
\nTotal expenses (789,951)
\nEBITDA 596,271
\nDepreciation (136,000)
\nEBIT 460,271
\nInterest 0
\nNPBT 460,271
\nIncome tax (128,876)
\nNPAT 331,395<\/p>\n
As at 30 June 2021
\nStatement of financial position A$
\nCurrent assets
\nCash 90,800
\nReceivables 205
\nInventories 593,116
\nOther 15,000
\nTotal current assets 699,121
\nNon-current assets
\nPlant and equipment 475,000
\nOther 10,000
\nIntangibles 400,000
\nTotal Non-current assets 885,000
\nTotal assets 1,584,121
\nCurrent liabilities
\nPayables 95,688
\nOther 1,589
\nTotal current liabilities 97,277
\nTotal liabilities 97,277
\nNet assets 1,486,844
\nEquity
\nContributed equity 10,000
\nRetained earnings 1,476,844
\nTotal equity 1,486,844<\/p>\n
Appendix 3
\nRisk profile
\nThe following is an extract from Ollie\u2019s risk register. Below the table, these risks have been plotted on a risk matrix.
\nRisk category Explanation
\nStrategic risk
\n\u2022 Retail environment and general market conditions
\n\u2022 Key role dependency on Amalia a. Ollie\u2019s products are discretionary and therefore sensitive to consumer sentiment and retail market conditions.
\nb. Amalia is the founder and CEO and has developed Ollie\u2019s IT infrastructure.
\nCybersecurity risks
\nReliance on online market \u2013 Ollie operates online only. c. Ollie collects customer data for every sale. The protection of customer and corporate data is critical.
\nd. Downtime caused by technical issues, hacking or other cyber-sabotage could damage the business.
\nFinancial risk
\nForeign exchange risk \u2013 Ollie purchases approximately 30% of its products from China in US dollars. e. An unfavourable exchange rate variance would impact gross profit (assuming additional costs are not passed on in sales price).
\nReputational risk
\nOllie has two exclusive ranges:
\n\u2022 collars and bandanas for cats and dogs
\n\u2022 high-protein, low-calorie dog biscuits. f. Any quality issues with these ranges could impact Ollie\u2019s reputation. Sales from these ranges make up 30% of revenue.
\nSafety risk
\nExclusive-range products are produced in a small factory and kitchen in Perth. g. Limited safety procedures are in place in this small business. The risk is considered low given the nature of the work performed; however, any staff downtime could affect productivity. In Ollie\u2019s history there have been no lost-time\u2019 incidents.
\nOperational risk
\nAs an online business, Ollie depends on marketing spend to attract customers. h. Marketing may not be correctly targeted, resulting in lower conversion of marketing spend to revenue.
\ni. There may be an overspend in marketing, recent growth in sales due to word-of-mouth recommendations and repeat business may mean the current marketing spend is too high.<\/p>\n
Risk assessment matrix<\/p>\n
Business Performance Assessment 3 \u2013 Case study<\/p>\n
Information on the background<\/p>\n
Donnys Boutique Pet Stores (Donnys) was established in 2012 as a specialist retailer of luxury pet foods and goods. Donnys was founded by Thomas and Rebecca O\u2019Donnell as a private company in Australia. Thomas and Rebecca each own 50% of the share capital. From its early days, Donnys sought to differentiate itself from its competitors by offering boutique brands to dog and cat owners who love to spoil their pets.<\/p>\n
Starting with two stores in high-income suburbs of Sydney, Donnys grew steadily and currently has twelve stores in Australian cities.<\/p>\n
Mission statement<\/p>\n
Donnys is a boutique, customer-focused business. Its mission is as follows:<\/p>\n
Where your pets always come first \u2013 a total experience for dogs, cats and owners<\/p>\n","protected":false},"excerpt":{"rendered":"
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