CASE: LightWorks (LW)

SYNOPSIS In late November 2021, Paolo Gonzalez was not sure what his next steps should be. After 10 months trying to get LightWorks off the ground, his newly acquired business had ground to a halt. The 30 clients that he acquired in January 2021 were generally no longer interested in doing any new business because of the declines in their own business due to the COVID-19 pandemic. As he started exploring his options, he received a contract job offer from Maple Leaf Bread (MLB) to be a Senior Marketing Manager. This position would require him to relinquish his own business which could be construed as a conflict of interest. He has two weeks to make a decision. PAOLO GONZALEZ Paolo Gonzalez moved with his family from Mexico to Canada in January 2021, to provide better opportunities for his children. His first steps were to get his Canadian driving permit, buy a car, select a townhouse to rent in a neighbourhood with good schools for his children, and to register his two daughters into elementary school. While his wife Maria was able to secure a contract accounting position at National Bank, Paolo was keen to start his own business in Canada. After a successful career as a Marketing Director for Bimbo, one of Mexico's largest bread and snack producers, he was determined to try to avoid the pressures and politics of corporate life, and to finally pursue his lifelong dream of starting his own business. Paolo and Maria moved to Canada with combined savings of $200,000. They intended to keep about half of this as a downpayment for a house, and the balance to invest in a business. He thought that starting a business from scratch in a new country without any connections or local market knowledge would be difficult, so he researched online for businesses for sale. One business, LightWorks (LW) particularly appealed to him. They provided website development and other marketing services to about 30 clients in Ontario. They were asking for $120,000 for their business, which Paolo believed was a good price as this was equivalent to about 1 times annual sales or about 2 times annual profits. He felt that this would be a good customer base he could build on to provide additional services and secure additional clients. Where Paolo did not have the technical capabilities himself to perform certain services, he felt that he could outsource these support services and still make a profit. MARKET TRENDS The marketing services landscape in Canada and globally has changed dramatically over the past 10 years. Digital marketing services such as social media and search marketing (Google advertising) have grown tremendously through the dominance of Facebook (FB, Instagram, Whatsapp) and Google respectively, while Marketers have hence allocated a lower percentage of their marketing budgets to traditional media such as television, newspapers, radio and outdoor advertising. Social media marketing, search marketing and email marketing were most in demand as these would generate revenue for clients. They were also the more profitable areas of business for service providers. Web Development and Search Engine Optimization were however more time consuming and less profitable. So from his own experience and market forecasts, Paolo felt confident that digital marketing was the right industry for him to invest in. Digital marketing is especially appealing to LW's small businesses as the initial investment outlay is not significant. However the cost of digital marketing is increasing as the duopoly of Facebook and Google are flexing their industry dominance. As a result, there is increasing regulatory pressure on all service providers to protect both businesses as well as consumers. Another challenge is the competitive environment. Every small business owner believes that since they know how to use social media, they can market their business for free by building a website and social media pages. But nothing could be further from the truth. Digital marketing is increasingly complex, costly and time consuming. Besides the business owners trying to market their own businesses themselves, there are literally thousands of "marketers" providing digital marketing services online. Paolo plans to use his own successful marketing leadership experience and take a more strategic and focused approach to each business client in order to differentiate himself from his competitors. LIGHTWORKS (LW) LightWorks has been operating in Ontario for the past 10 years. The business has been run by a husband and wife team out of their home office. He travels and does all the client facing work. She does all the client website development, design and technical marketing support. Most of the work done pertains to website development and updates, although they do provide some social media, email marketing and search engine marketing support for some clients. Their clients cover a broad scope of industries including restaurants, dentists, naturopathic clinics, small retailers and specialty service providers. The 2020 Income Statement for LW is shown in Appendix 1. After 10 months managing LW out of his home office, Paolo realized that his revenue and profits had fallen well short of those presented in the audited financial accounts provided by LW. The main reason for this was the onset of the Coronavirus pandemic (COVID-19). Very few of the acquired clients were willing to invest in marketing their businesses as they were not sure how long the pandemic would last or whether their businesses could even continue to survive. Paolo's initial focus was to retain the confidence of the clients he acquired. In his first 30 days of acquiring the business, he personally visited all 30 clients in Ontario and felt he was able to retain them as clients. So no new clients were acquired in the first 10 months of business. Most of the work required from the existing clients were website and social media updates, email marketing and some search engine marketing. Prices for these services ranged from $200 - $800, with a 2021 YTD average of $400. The direct cost of these services include web development, web hosting, domain renewals, social media advertising, paid search advertising, search engine optimization (SEO), email marketing services, graphic design services, software licenses and subscriptions. The cost per job would vary, as minor jobs Paolo would do himself, but most of the work required specific technical expertise he would outsource to different service providers. For simple website changes and social media updates that can normally be completed in 2 hours, he would charge his own hourly rate of $120 / hr. These smaller jobs accounted for 30% of 2021 revenue, and consumed a considerable amount of Paolo's time. The other 70% of sales were for more complex jobs for bigger clients which Paolo did not have the technical expertise himself to manage. Paolo would contract these out to third party service providers who would normally charge $100 an hour. So while these more complex jobs would take an average of 5 hours to complete and generate revenue closer to $800 for each job, Paolo's net margins on these more complex jobs were considerably less because the work was being outsourced. While the bigger jobs gave Paolo the time needed to focus on managing and growing the business, Paolo knew that the margins on outsourcing these services was not a sustainable business model. The 2021 Year-to-date (YTD) Income Statement and Balance Sheet for LW is shown in Appendices 1 and 2. As trying to deliver the services for smaller jobs on his own was too time consuming, and trying to outsource the more complex services was not very profitable, Paolo realized that he would eventually need to build his own in-house capability to provide a range of services to his clients. This will also enable him to position his business to provide more specialized services to attract larger clients A good resource to be able to provide the full range of technical services required will cost Paolo about $40,000 per year. With the uncertainty of the duration of the coronavirus pandemic and with his own personal funds running low, Paolo was not sure whether now was the time to invest for growth. PENDING DECISION The high cost of living in Canada has taken Paolo and his family by surprise. Having invested in LW, his expenses have began to consume the remaining savings which the family planned to invest in a home in Toronto. The challenge is that no one knows for sure how long the COVID-19 pandemic will last. Paolo therefore started looking into potential job opportunities in Toronto. He successfully interviewed and received an offer for a Senior Marketing Manager position at Maple Leaf Bread (MLB). Although this was a much lower level of responsibility that what Paolo had in Mexico, the $70,000 annual salary would certainly be welcomed relief for the family's expenses. MLB has however insisted that he will need to relinquish his LW business as this could be considered a conflict of interest. With the significant decline in sales in 2021, Paolo knew that he may only get about $50,000 if he were to sell LW now, a fraction of the $120,000 he paid for the business. Paolo was however not sure whether he should sell his business for a contract opportunity that may or may not extend beyond the contract year. Paolo now needs to decide whether he should: a) Sell his LW business and accept the offer from MLB. b) Resource his LW business to be able to provide the technical services for his clients in-house c) Ride out the pandemic and hope that business will rebound by summer 2022. APPENDIX 1 LIGHTWORKS INCOME AND EXPENSES 2020 and YTD OCTOBER 31, 2021 2021 2020 YTD: Jan-Oct Jan-Dec SALES REVENUE Web Development 17,200 68,250 Social Media Marketing 12,580 5,950 Search Engine Optimization 5,950 5,800 Search Marketing 8,950 6,315 Email Marketing 3,500 4,600 TOTAL SALES REVENUE 48,180 90,915 COST OF SALES (In house and outsourced) 18,771 6,514 GROSS PROFIT 29,409 84,401 OPERATING EXPENSES Advertising and Promotion 1,300 585 Bank interest and fees 178 255 Occupancy Costs 3,658 7,850 Stationery and office supplies 1,969 2,144 Telephone and Communications 1,540 434 Entertainment 1,180 876 Travel / Vehicle Expenses 8,377 6,552 TOTAL OPERATING EXPENSES 18,202 18,696 NET INCOME 11,207 65,705 Income Tax (25%) 2,802 16,426 NET INCOME AFTER TAX 8,405 49,279 APPENDIX 2 LIGHTWORKS BALANCE SHEET as of 31st October, 2021 ASSETS Cash and Deposits $ 8,455 Accounts Receivable 2,765 Goodwill 90,000 TOTAL ASSETS $ 101,220 LIABILITIES Bank Overdraft 1,658 Trade Payables 157 Due to individual Shareholders 90,000 TOTAL LIABILITIES 91,815 EQUITY Common Shares 1,000 Retained Earnings 8,405 TOTAL LIABILITIES AND EQUITY $ 101,220

Answer the following questions (use as much space as required):

1.Environment Analysis:

Prepare an Environmental Scan for LightWorks (LW)

Political / Regulatory:

Economic:

Social / Trends:

Technological:

Competitive:

15 pts

2. SWOT Analysis: Submit a SWOT Analysis for LW

STRENGTHS	WEAKNESSES
OPPORTUNITIES	THREATS

10 pts

3.Strategy / Positioning:

a) Prepare a BCG Growth Matrix for LW considering the growth and profitability of the different services.

b) Do you believe that LW should continue to provide broad digital marketing services to small businesses or focus on a few specific digital marketing services to provide to medium-sized businesses? Explain the rationale for your decision?

Relative Market Strength

High Low

STARS	QUESTION MARKS
CASH COWS	DOGS

High

Market Growth Rate

Low

20 pts

4.Finance:

a) Is the 2020 income statement from the previous owners a true reflection of the profitability of LW? Why? Why not?

b) Considering the different ways to assess the value of a business from the 2021 YTD income statement and Balance Sheet, how would you determine whether $50,000 is a fair price for LW today?

20 pts

5.Operations:

What would be the additional annual revenue required to cover the cost of hiring a full-time resource to manage the digital marketing operations of LW? Show your calculation.

15 pts

6.Leadership:

As Paolo Gonzalez, would you:

a) Sell LW and accept the offer from MLB.

b) Resource LW to be able to provide all the technical services for his clients in-house

c) Ride out the pandemic and hope that business will rebound by summer 2022.

List the Pro's and Con's. Explain your reasoning based on your analysis of the business, the environment and Paolo 's personal circumstances.

	Pro's	Con's
Sell LW
Resource LW
Ride it out

20 pts