• The store by store data received from the parent company and individual stores is correct. The store data was received and plotted to gain an understanding of the overall health of each of the individual stores. See attached excel file.
• In the instance where data was not received or unreliable, an average was used for that particular month. This only occurred in 3 months of data received.
• The operational column in the store-by-store analysis were the debits received by the franchisor that were not profit, but were reimbursement for items purchased for franchisees. It was somewhat difficult to determine how this should be recorded on the income statement to get accurate numbers. The final decision was to create a reimbursement line on the income statement that took the amount for 2013 ($134,221) out of both revenue and expenses. This left the net profit unchanged but gave a more accurate number for both revenue and expenses.
• The projections were done for the years 2014-2018 (5 years). This timetable is the one softly set by the possible new ownership group to build and resell the business. Also, after five years it was felt that the accuracy of the projections could come into question.
• The new franchise fee would increase from $75,000 per store to $90,000 per store.
• The parent company cost to build a store would be $80,000 ($10,000 profit). The cost timeframe would be an $80,000 expense in the month that the store opened.
• The purchase of the parent company would be financed with all equity. An individual or team of investors would pay the purchase price and they would receive equity in the Runway Fashion Exchange parent company. The value of the equity would increase as the company added more stores and increased average monthly royalty income. A moderate credit line would be established to help plug cash flow issues as needed.
• Most of the expenses would be fixed going forward. Although unlikely that it would stay fixed, the first year’s projected expenses are on the higher end and are more like an average than a true projection. This gives the five year projection more accuracy and a realistic outlook. It is recognized that as the company grows there will be increased overhead and fixed costs.
• The 10% royalty was assumed to stay constant throughout the 5 years. There is likely to be downward pressure over time (especially if the start-up investment is increased or the parent company does not provide strong support for franchisees thus reducing the satisfaction for royalty paid). Obviously, this would decrease the cash flows of the company and bring down its projected value, but due to the current set up of the company it was assumed that the 10% royalty would stay constant for the next five years.
Sensitivity Analysis/Owner Financials
• The 2013 net profit of $253,888 was used with a multiple valuation to determine what the company should be bought for. $45,594 (this was the difference of...