CASE 6: PALM SPAR - VALUATION

You are the consultant for Peter Smit who wants to buy an existing business in the Free Sate. Peter is 50 years old and has recently been retrenched from his job as marketing manager. The reason why he wants to go into business is not only to generate an income, but also to provide his son of 23 with a job. He is in good health and is prepared to invest his whole package of R7 200 000 in this new venture. He identified Palm Spar (a retail convenience grocery store) in Clarens as a potential business to buy (see the attached financial statements). Peter has obtained the following information:

There are already more than 750 Spars in South Africa with a success rate of almost 95%. Most of these Spars are franchises with a close link to the Franchisor. The Franchisor supplies the various Spars with products, training, as well as business advice. It seems an ideal business for Peter to buy, since he has little experience in running a small supermarket. According to the Franchisor, the typical gross profit margin for a Spar is 21%, depending on the product mix. The product mix of Palm Spar in Clarens is very standard to an average Spar, comprising of groceries, perishables, fruit and vegetables, meat, bakery, deli, cigarettes and sweets. Palm Spar is open seven days a week, from 07:00 to 19:00. The fixed assets (equipment, fridges, etc.) are still in a very good working order and if it had to be replaced today, will cost more than R11,5 million.

Clarens is also one of the few towns in the Free State showing quite a dramatic population growth. It is increasingly becoming a tourist attraction and the prospects for the future are looking good. All indications are that the population of Clarens will grow at more than 4% per annum (excluding inflation) for at least the next 10 years. Palm Spar was founded five years ago by Jim Sweet. Jim was a local farmer in the district who sold his farm to start Palm Spar. He is 60 years old and his reason for selling the business is to go back to farming.

3.1 List some additional questions you would like to ask Jim Sweet to assist you in determining the financial viability and the purchase price of the business. (6)

3.2 Peter has appointed you, a consultant, to determine the purchase price for Palm Spar. The tax rate of the business is 28% and no provision for the management salary of the owner was made. The expected inflation rate for the next couple of years is 6% per annum. Compute the purchase price and show all your assumptions and calculations (the current liabilities are for the account of the seller and should be excluded from your purchasing price).

NET SALES \begin{tabular}{|r|r|r|r|} \hline 34800 & 47600 & 52640 & 61284 \\ \hline \end{tabular} 67412 74154 \begin{tabular}{|l|r|r|r|r|r|r|} \hline GROSS PROFIT & 8660 & 12400 & 14008 & 16344 & 17978 & 19776 \\ OPERATING EXPENSES & 7032 & 8202 & 8884 & 9825 & 10711 & 11683 \\ \hline \end{tabular} Operating Profit 1628 4198+5125 6519 7267 8094 Net Operating Profit 1628 41985125 6519 7267 8094 Net Profit Before Tax 1243 3851 4890 6428 7267 8094