The Problem. Larry Brownlow faces the following problem regarding the use of his trust fund money in the potential investment in the SD Coors distributorship.
- Does the South Delaware Coors distributorship offer sufficient investment potential given Mr. Brownlow’s current business and personal situation?
Recommendation. Mr. Brownlow should proceed with the investment in the South Delaware Coors distributorship. This recommendation is based on the following decision factors relevant to the case.
Profit Potential. The most important decision factor is the profitability of the venture. In order to properly calculate the venture’s profit potential, it is necessary to understand the initial investment and fixed costs. Mr. Brownlow’s original estimates are mostly correct with only a few line items missing. The missing items have been added to Table 1 to create a best-case scenario that includes an initial investment of $810,000 and annual fixed costs of $443,033.94.
The break-even analysis in Table 4 shows that a modest 6.35% of the year 2000 market share is necessary to prevent a loss. In a worst-case scenario with higher fixed and variable costs, 7.46% market share is necessary. Both of these market share percentages are below the national average for Coors as detailed in Table C.
The pro forma income statement in Table 5 indicates a small loss in 2000 with increasing profits in 2001 and 2002. The sales revenue estimates are based on a conservative initial market share of 6%. In 2001 and 2002, market share is increased to 7% and 8% respectively. All of these market share estimates are below the Coors national average and should be considered conservative.
Brand Recognition. Developing a brand is a major hurdle for a new venture. The South Delaware Coors distributorship is fortunate that Coors has already developed the brand and continues to maintain the brand integrity. Additionally, this has the benefit of limiting the amount of marketing and advertising that Mr. Brownlow must do for his product. Fortunately, the South Delaware Coors distributorship need only focus on the few hundred beer retailers in Kent and Sussex counties. The more costly responsibility of attracting consumers falls to Coors and the retailers.
Quality of Life. The South Delaware Coors distributorship addresses one of Mr. Brownlow’s driving concerns: finding a challenging job and making it on his own. Owning and operating the South Delaware Coors distributorship will certainly prove to be a challenging experience for Mr. Brownlow. This is exactly the sort of challenge that Mr. Brownlow is looking for.
Exit Strategy. A major concern for any entrepreneur is how he will exit or harvest the business when the time comes. Fortunately for Mr. Brownlow the distributorship comes with a built-in exit strategy. When Mr. Brownlow decides that time has come to move on from the distributorship, finding a buyer for the business should not be difficult. Coors has already decided they intend to sell in Kent and Sussex counties. In order to maintain sales in the area, it will be in their interest to help Mr. Brownlow find a buyer. Even if Coors does nothing to aid Mr. Brownlow, the business opportunity is attractive enough to ensure a quick sell.
Economic Stability. The sale of alcohol has a tendency to weather economic storms better than other items. For a first investment, Mr. Brownlow has chosen a market that will tend to react more mildly as the economy experiences peaks and troughs.
Entrepreneurial Experience. Although Mr. Brownlow has the benefit of his MBA education, this is his first entrepreneurial experience. He is, without a doubt, going to make mistakes. Although his lack of experience may normally be a negative decision factor, the lower complexity of the dealership lowers the impact. Mr. Brownlow will need to consider adding experienced mentors and business associates to his circle. An example is the accountant whose retainer has been added to the list of fixed costs in Table 1.
I would have included the tables mentioned above, but converting them was a big PITA.