Business Plan Case.

Smittys Lil Haulers

It was October 1998 and Jeff Malott, a young, aspiring entrepreneur, had just toured the rustic factory and retail store of Smittys Lil Haulers, a Shedden, Ontariobased manufacturer of childrens toy wagons. Jeff was very impressed with what he had seen. Smittys was for sale and Jeff wondered if this was the right opportunity for him.

Jeff Malott was a native of London, Ontario. Following high school, he apprenticed as an automotive mechanic specializing in European automobiles. Before he completed his apprenticeship Jeff realized he had a strong desire to pursue his own business. Jeff began his entrepreneurial pursuit by enrolling in business classes at local colleges. One of the ideas he was interested in exploring was a nightclub and bar concept. The lifestyle attracted him and he thought he had some ideas that would make the business a success. Jeff took a part-time job working for UPS while he pursued his education. His exploration led him to Londons Small Business Centre in 1998 for some assistance in writing the business plan for the proposed bar. They in turn referred him to George Lightfoot, a retired commercial banker who had started a private entrepreneurship training school.

Jeff and George discussed Jeffs ideas at length. This led to Jeff enrolling in courses at the school to acquire additional business skills needed to run a small business and to finalize the business plan for the bar. In September 1998 George approached Jeff to take a look at Smittys Lil Haulers as a possible alternative to starting the bar and nightclub. George was acquainted with the owner of Smittys and had been approached to assist in finding a buyer for the company. Initially, Jeff was surprised by the idea of buying a business. He had simply never considered it.

JEFFS SUPPORT NETWORK

Jeff was fortunate in having a strong support network. His parents were very pleased with his entrepreneurial aspirations, although Jeffs father was not in favour of the bar idea. Jeff had been exposed to entrepreneurship from a very early age. His mother had run a successful restaurant in London while Jeff was growing up. She sold the business in 1986 and immediately started a second business in executive transportation, which she sold and retired from in 1993. Jeffs girlfriend Sharlene was very encouraging of his aspirations, and Jeff also had a network of family members and friends to discuss his ideas with and on whom he could call on to help start up a business.

SMITTYS LIL HAULERS

Smittys had been founded in 1986 in the small town of Shedden, Ontario, about 35 kilometres southwest of London, by John Smith and his family. The business made a line of rugged, high-quality toy wagons that could also be used for chores around the home and garden. (See Exhibit C3-1 for details on the product line.) The parts for the wagons were purchased from various suppliers and assembled in a made-over barn on the farm of one of Johns friends. (See Exhibit C3-2 for photo.) They were sold through a retail store in Shedden and through a network of farm implement distributors and other select retailers in the southwestern Ontario region. About 65 percent of sales were through the Shedden store. Sales through these channels had grown to 400-500 units per year by 1978.

Smittys had also ventured into the retail furniture business. John had created a division called Once a Tree to retail hand-crafted fine furniture made by regional craftsmen. They supplied the store in Shedden with china cabinets, tables, chairs, and shelving units, which sold at a premium price compared to the volume-manufactured items sold in urban furniture stores. This division accounted for about 30 percent of Smittys sales volume by 1998.

In the mid-1990s Smittys was able to secure two large orders for wagons: a 3000-unit order from a major tool distributor and a 600-unit order from a chain of independent retail hardware stores. The tool company used the wagons as part of a promotion to its dealers, and the wagons were branded with the company name and logo rather than the traditional Smittys brand. The hardware stores sold the wagons through their network in southwestern Ontario. Smittys had also entered into negotiations with Canadian Tire to distribute their wagons but were unable to come to a deal. These orders had been completed by the time Jeff first met John.

The size of the two large orders strained Smittys assembly and financial capacity and the stress

took its toll on John Smith. According to Jeff, the strain nearly killed John. Faced with serious health problems, John approached his friend George Lightfoot to help him find a buyer for Smittys. John was not interested in just any buyer, however. He wanted someone who would take care of the business, according to Jeff. John wanted a buyer who would leave the business in Shedden and who had the same small-town values of quality and good value for the customer.

JEFFS IMPRESSIONS OF SMITTYS AND THE PROPOSED DEAL

Jeffs was very excited by his visit to the Smittys assembly plant. His mechanical background told him this was a quality product, if a bit rough. He saw lots of opportunities to improve the design, the quality, and the operation of the business. For example, Smittys had a paper-based, somewhat loose accounting system in place. The books were put in order only at the end of every year by the accountant. Smittys also had no presence on the Internet. In fact, the business did not even own a computer. Jeff also thought there were opportunities to grow the business, either by pursuing additional large orders or by expanding the distribution network. He also thought the business would eventually have to leave Shedden in order to achieve this growth, and this would likely be a deal-killer for John.

Jeff and John talked at length about the business during Jeffs visit. John liked me, according to Jeff and, he liked my youthful enthusiasm. John shared some financial statements with Jeff and was very proud to point out the huge impact the two large orders had on the companys results. John wanted $100,000 for Smittys, which included the inventory of parts and finished goods, all tools and equipment, goodwill, and the Once a Tree furniture division. Jeff was not really interested in Once a Tree, but John insisted it had to be part of any eventual deal.

JEFFS ALTERNATIVES

Following his visit to Shedden, Jeff pondered his alternatives. There was the possibility of going full time with UPS and trying to climb the ladder there, but that really didnt appeal to him. He was sure his future was in owning his own business. Now the Smittys option presented itself and, while he had been impressed by his visit to Shedden, the notion of buying a business left him wondering what to do next.

THE RIGHT OPPORTUNITY?

If buying Smittys was the right opportunity for him, Jeff had first to answer several questions. How should he assess the Smittys opportunity? Were there better opportunities out there? If he did decide to pursue Smittys, how should he finance it? He had some money saved up, but nowhere near the $100,000 John wanted. What was a fair price for Smittys? Jeff realized he had some soul-searching to donot to mention a lot of work over the next several weeks.

Homes

ADDITIONAL DATA IS PROVIDED BELOW:

Model Deck Features Retail Price % of sale Cost Margin% 100 16 32 Solid rubber wheels; 2-board rails $109.95 25% $ 87.96 20

CONTD

Sales (Units) Total number of units sold, all models. 1995 1000 1996 2300 1997 2400 1998 2500 Smitty Companys Overheads Over

Contd

Competitive environment: 2 main competitors compared with Smittys Factors Quality Price Promotion Wagoners Able Wagons Sligh

TASK:

Assuming Jeff buys the business in 1998, write a Business Plan for him which will guide him to take the business forward in the next 3 years.

Use the Business Plan Content Details as a guide to write your Business Plan which should:

Be professionally written and formatted. All the heads/titles listed in the content details (eg Executive Summary, Marketing Plan etc) may be included. Include the following in you Plan and ensure the Plan answers the following questions:

Would you rationalize Smittys product range? Why or why not? Make a detailed table for sales as projected for the next 3 years. Marketing Plan Describe current operations of Smittys. Do you agree on improvements? What will constitute the Management Team? Any other persons to be hired? Include legal considerations in the Plan (among owners, what happens to Once a Tree, shifting of operations outside of Shedden and so on). Projected or Pro Forma Income Statement for the next 3 years. Is $100,000 a fair price? Why or why not? Once a Tree is part of the deal. What can Jeff do about it in the future? Jeff has calculated that it will take $30,000 to improve quality, design and operations. Should he spend this additional money? When? Should Jeff finance his buy-out through a loan or equity? Calculate: Return on investment Return on equity Payback period (no. of years it will take for Jeff to get his investment back). Internal Rate of Return (additional marks).