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Too Hot To Hold Essay

1881 words - 8 pages

The case study “Too Hot to Hold” (Katz & Green, 2014, pg. 182), describes a business buying opportunity available to Gwendolyn Bonnefille, a struggling single mother. The business for sale is a small, apparently home-based, hot sauce making business. Sly, the current owner, makes, bottles, and labels the Caterwauling Coyote hot sauce from his kitchen, and then distributes the finished product to gift and specialty shops in Texas (Katz & Green, 2014). In her quest to purchase the business, Ms Bonnefille discovers that there are some inconsistencies between the business’s financial statements and the Sly’s personal tax returns. The case study provides the Sly’s explanation for the ...view middle of the document...

Once Ms Bonnefille has determined that her experience, education, and skills are sufficient to go forward with the purchase of Caterwauling Coyote, she will want to begin an in-depth scrutiny of all the aspects of the business. This process, according to Katz & Green (2014), is called due diligence and is defined as “the process of investigating a business to determine its value” (pg. 167). Due diligence includes, but is not limited to interviewing the seller, scrutinizing all pertinent financial statements, examining business sites and tangible assets, understanding employees and suppliers, and developing an acquisition business plan (Katz & Green, 2014). According to the information supplied in the case study, Ms Bonnefille is in the midst of this process, as she has already considered the condition of the tangible assets, viewed the financial statements, and spoken to Sly about the financial statement discrepancies. However, before she moves forward with the purchase there are many more items she will need to consider.
One of the first considerations Ms Bonnefille will need to take in to account is the financing offer Sly is offering. Assuming she determines the $240,000 (Katz & Green, 2014) business valuation is correct, does she have the ability to come up with the $50,000 down payment and can the business support the monthly payments of $2,041.75 (Bank Rate, 2014), while still providing her a reasonable income, meet expenses, and support business growth. This will require Ms Bonnefille to dissect completely the income statements Sly has supplied to determine if sales and expense figures seem legitimate and accurate. This may also require Ms Bonnefille to ask Sly to supply further documentation, including providing several year’s worth of financial statements and tax returns. Ms Bonnefille’s understanding of the financial condition of the company would also increase if she could get Sly to provide his general ledger system and/or check register and banking statements. The more financial information Ms Bonnefille can get Sly to supply, the better equipped she will be to analyze and determine the true health and growth potential of Caterwauling Coyote. According to Ochse (2013), having several years’ worth of financial statement information allows the buyer to do a horizontal analysis of the business. Horizontal analysis allows the buyer to look for upward and downward trends in sales and expenses from year to year (Ochse, 2013). It also allow the buyer to compare expenses to see that they remain proportional to sales, compare each income statement line item as a percent of sales to ensure consistency and highlight any gross differences year over year, and evaluate balance sheet items as a percent of total assets to quickly identify any distinct changes (Ochse, 2013). A complete horizontal analysis will greatly improve a buyer’s ability to understand the financial stability of the prospective company, and better highlight financial concerns...

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