Background Richardson Repair Services Inc. (RRS) provides maintenance and repair services for commercial and industrial clients. 75% of their revenues are under contract, with their customers typically agreeing to terms of 3-5 years. The company was founded by owner and CEO Ahmed Richardson 15 years ago. While they are in a larger and more updated facility, RRS operates just around the corner from its original single bay light industrial unit in Anytown, USA. Ahmed is active in the business, but mostly in a relationship management role ensuring that top enterprise customers are satisfied with the level of service provided; he has no intention to step away from the business within the next decade. Prior to founding this company Ahmed spent 5 years learning the heavy machinery maintenance business from a close family friend. While RRS has done extremely well, Ahmed relies heavily on his CFO when it comes to financial matters. RRS has been a client of your financial institution since its inception, and Ahmed is himself a personal client. Ahmeds adjusted net worth is approximately $3,000,000 with about half of it in home equity and the rest in an investment portfolio of Exchange Traded Funds (ETFs) and term deposits. In the last three years his son Bilal joined the family business, although he does not hold an ownership stake. Bilal has an FMVA and a CFA, and has been actively encouraging his father to be paid back some of the promissory note in order to help generate a higher return on his equity. While he has not expressly said so, it seems clear that Bilal would like his father to sell the business and to retire. Concentration is low in the machine and maintenance repair service industry, with lots of small and mid-sized players like RRS achieving success in their local markets by emphasizing customer relationships. The present transaction is an annual review with a requested increase. RRS is looking to overhaul its fleet of vehicles and to add equipment in order to be less reliant on subcontractors. They wish to borrow up to $1,000,000 to do so. Industry The maintenance and repair industry is in the mature stage of its lifecycle, with rising labor costs being the biggest near-term threat to the current margin profile. Revenue volatility is generally medium/high in this industry, while regulation is low and steady. Industry revenues are growing at an annualized rate of 2%, but this is expected to increase to 4.5% over the next 5 years. Technological change is moderate. Some key industry ratios are as follows: Net margin: 4.9% Gross margin: 19.4% Debt service coverage: 1.9x Total liabilities to equity: 1.2x Current ratio: 1.7x Funded debt to EBITDA: 2.1x

1. What factors might be causing Richardson Repair Services' Gross Margin to be lower than the average of their peer group? (select ALL that may apply)

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Interest expense from the large promissory note

Offering lower prices to entice clients to sign on for longer contract terms

Excessive dividends

A higher proportion of subcontractors rather than salaried employees, compared to their peers

2. Which of the following facts from the case suggest that Ahmed is financially conservative? (select ALL that apply)

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RRS had over $500,000 cash on hand at fiscal year end

His investment portfolio is mostly individual equity securities

He has a 3.5MM loan to the company that he does not seem rushed to pay back

Revenues appear to be growing steadily, suggesting a methodical and conservative growth strategy